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BlackRock tips continuing equity growth
17 July 2013
Low inflation and Treasury yields supportive of markets
Moves by the US Federal Reserve to dampen down speculation over the end of QE, combined with modest inflation, should support continuing equity growth, according to BlackRock.
In a note to investors, the bank's chief investment strategist, Russ Koesterich, said that the “more doveish tone” from Fed chairman Ben Bernanke over the tapering and end of quantitative easing had gone some way to easing market concerns. Bernanke's comments that the Fed was unlikely to make abrupt increases to short-term rates saw 10-year Treasury yields fall from 2.72% to 2.59%.
“One of the main issues affecting global financial markets in recent weeks has been the increase in interest rates that has resulted from investor concerns over a potential change in Federal Reserve policy. Last week saw a reversal of that trend,” Koesterich said.
He added that while fixed income markets were likely to remain volatile, a “precipitous drop in prices and overly dramatic advance in yields” was unlikely, in part thanks to modest US inflation, which allowed the Fed to move at a more leisurely pace.
“Although several members of the Federal Reserve have clearly indicated that the central bank’s long-standing easing bias presents some risks, without inflationary pressure the Fed is unlikely to quickly shift away from monetary accommodation,” he argued.
Koesterich said the strong US dollar had contained import prices to 0.2% in June on a year-over-year basis and had actually fallen by 0.5% when oil price moves were stripped out.
Excluding energy and food prices, data from the June Producer Price Index showed a 1.7% rise - “close to the lowest level seen since early 2011”.
He said that as long as Treasury yields do not rise significantly, there was little reason not to expect equity markets to continue to rise – albeit more slowly than at the start of the year – as corporate balance sheets “remain quite healthy” and equities are reasonably priced, in terms of relative to their own historical valuations as well as to bonds and cash alternatives.
“Our view is that we are likely to see further equity price increases over the next six to twelve months - although the pace of gains is unlikely to match what we saw in the first half of the year.”
Koesterich added that investors should look more widely than the US, in particular at Europe, as despite the economic issues “international stocks look inexpensive and have already discounted potential bad news”, with international developed markets trading at a 35% discount to US stocks.