Financials, healthcare sectors to watch while bond proxies will suffer
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Global market growth will accelerate further in 2017, tempered by political risks across much of Europe and the US, while correlations between bonds and equities will continue to unwind, says BlackRock's Belinda Boa.
The US financial and healthcare sectors are particularly attractive, while Australian equity markets are insufficiently diversified, according to BlackRock executives Belinda Boa and Steve Miller.
"In the US, we remain very favourable still on financials…because what I think we're seeing [is that] valuations are still attractive," says Boa, chief investment officer for active investment, based in Hong Kong.
"I think we can expect a re-rating in this sector, given some of the post-Trump policies, whether it's on corporate tax reform regulation and other areas, again, which would be very supportive for financials.
"Of course, there is a difference between what people say, and what they own. In this part of the market, I think it's under-owned…but we think it's very much a buy," Boa says.
However, she emphasises the need for investors to weigh companies on their individual merits. "[Healthcare] has been a big area of uncertainty ahead of the US election. And in a lot of areas, it is very much around being selective."
Australian market not deep enough
From an Australian perspective, Miller--who is head of fixed income, managing director and fund manager of BlackRock Australia--is cautious about the lack of diversification on offer to domestically-focused investors.
"When it comes to thinking about the Aussie equity market, the thing that strikes us the most is the lack of diversity. Some people say--somewhat flippantly--that it's a bank next to a hole in the ground.
"Notwithstanding the more positive view on global financials, I think there are some idiosyncratic elements that apply to the Aussie market," he says, referring particularly to Australian banks' high exposure to housing via mortgage lending.
"Banks here are restoring their capital bases, we've already seen a couple of out-cycle mortgage increases; we have got the spectre of a sovereign ratings downgrade hanging over us, and that probably has greater implications for the banks than it does for the sovereign in terms of its cost of funding.
"Given that banks are a big part of the Aussie market, and the other big part are the miners, and the attendant uncertainties there…we aren't negative on the Aussie market…it does eke out gains in line with the US or Europe, but there's probably even greater returns to stock-picking and sector-picking than there would be ordinarily," Miller says.
BlackRock's global investment outlook for 2017 revolves around three key themes: a pick-up in global growth; reflation; and policy.
"These have been a continuation of themes from Brexit, but I think they have been amplified by the US election result.
"This is positive for equities, while on the flipside it's been negative for the bond-like proxies," says Boa, who believes that globally, "we're at a very important inflection point in terms of markets, in these three areas."
She points to several indicators tracked inside BlackRock, covering both micro and macro perspectives: "We feel this indicator has for some time been showing this growth trait, and we think there's further upside when you look at that, versus consensus."
"The majority of that is coming out of the US. Another interesting country, in terms of that change in positive consumer sentiment, is Japan."
On reflation, Boa says this has been assisted by some amount of stabilisation in China.
"This is a theme that's been building since the middle of the year, and we've seen the US election amplify this in terms of growth and inflation outlook, as well as the policy shifts toward more fiscal."
On the risk front, Boa believes political uncertainty is set to continue, at least in the short-term.
"We're still in an environment that is dominated by political risk, and I think that this is going to continue in 2017.
"That is particularly true in Europe, where a number of countries will be having elections in the next year--Italy, France, Germany, The Netherlands--all of them facing elevated political risks against this rise of populism that we've seen over the course of 2016," Boa says.
A shift in cross-asset correlations is a theme Boa emphasises repeatedly, and which underpins much of BlackRock's outlook for 2017.
"We think this reflationary period will be challenging for government bonds…one of my global colleagues has said that this is the end of the 25-year bull run in bond markets. This is a big significant change in terms of the direction of markets and what we see playing out in terms of this reflationary theme," Boa says.
"I do think the way we think about bond markets, particularly the US, is very different from what we've seen over a number of years. But it's going to be a gradual rate environment."
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Glenn Freeman is Morningstar's senior editor.
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