The outlook for the Australian economy remains cautious despite improved global forecast, according to BlackRock.
The global investment outlook would be dominated by broadened reflation, expected modest rise in yields, and relatively attractive emerging market valuations.
BlackRock’s head of investment strategy, David Griffith, said yesterday during a media briefing in Sydney that reflation had become more of a global trend now and was expected to spread to other regions outside of the US.
“This sort of reflation was driven by the US economy initially and what we are seeing now, it’s broadening now to be a more global theme. Both the US and the other countries from G7 are driving this reflation story,” he said.
He also said that the firm believed the yields were “set to move a little bit higher, but not too much higher” and that the emerging markets saw some strong inflows.
“From an equity perspective we do see some more value in the emerging markets, particularly in Asia, Japan and we have some positive views now on Europe, given that some of the political risks have now passed.”
As far as the Australian economic outlook was concerned, BlackRock said it remained cautious and it expected the Reserve Bank of Australia (RBA) would keep the cash rates unchanged in 2017.
BlackRock’s head of Australian fixed income, Craig Vardy, said: “Our base case is for the RBA to keep the cash rate unchanged at 1.5 per cent in 2017 and we could probably extend that out to at least Q1 2018 perhaps even to Q2”.
The other key risks to the domestic economic outlook were financially constrained consumers, a subdued labour market leading to a higher unemployment rate as well as slowing housing market and China’ efforts to tighten liquidity conditions and to curb leverage.
Also, BlackRock expected to see the continued weakness in key commodity prices as China’s rebalancing would continue to drive the commodity complex lower.
Griffith said that multi-asset investors would potentially face lower returns from traditional balanced portfolios compared with the recent past.
According to him, investors would also need to make portfolios work harder to diversify and find asset value across asset classes.
“We prefer slightly higher allocation to international equities,” he said, explaining that within international equities BlackRock would aim to add to emerging markets equities, real estate investment trusts (REITs) and infrastructure.
At the same time, it would be essential to make greater use of factor-based strategies in portfolio construction
“And then from an income perspective, given the sort of sustained “lower for longer” outlook for rates here in Australia, we do see benefit in seeking global source of income,” Griffith said.
“We think of ways where you can potentially maintain the attractive level of global income.”
