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Risk assets such as stocks and corporate bonds have further to run in 2014 even as a global tide of easy money slows, according to the BlackRock
(NYSE: BLK) Investment Institute’s 2014 Investment Outlook.
The Outlook, “
Squeezing Out More Juice,” considers key factors — such as the gradual exit from quantitative easing in the United States, tentative signs of a (weak) European recovery, Japan’s growth plan and China’s reform agenda — and their potential to create upside surprises or unforeseen downside risks.
"2014 is the year to squeeze more juice out of risk assets," said Ewen Cameron Watt, Chief Investment Strategist of the BlackRock Investment Institute (BII). "But investors should be ready to discard the fruit when it starts running dry."
The BII introduces three investment scenarios for 2014 against a backdrop of low nominal growth and monetary policy choices driving markets.
Low for Longer, the base case with a 55% probability, features tepid economic growth and loose financial conditions.
The bull case (25%),
Growth Breakout, has growth accelerating and liquidity gradually tightening. The bear scenario (20%),
Imbalances Tip Over, highlights the many things that can go (very) wrong.
Is Monetary Policy the Panacea for all Ills?
Developed economies should accelerate in tandem for the first time since 2010, the BII noted. However, a key worry is that global central bank policies geared toward stimulating growth might now be "pushing on a string."
"Low nominal growth cannot be solved by monetary policy alone," the BII said. "Monetary growth does not address skill mismatches, aging populations, labor market red tape and protectionist policies. Central banks can ease some of the pain — but ultimately policymakers must deliver structural reforms to boost growth."
The Hunt For Effective Diversification Heats Up
Low for Longer scenario, real rates and overall volatility will stay subdued, and market momentum could easily propel equities higher. However, a fundamental problem for stocks is that prices, not earnings, are now driving returns.
"Investors have jumped on the momentum train, effectively betting yesterday's strategy will win again tomorrow," the BII noted. "Rising correlations between bonds and stocks are making well-diversified 'safe' portfolios riskier than they appear."