BlackRock Says Second Half of 2016 Could Get Ugly

July 13, 2016 by

blackrockBlackRock analysts recently gathered to update their second half 2016 outlook, and there’s not a bull in the bunch.

The expert consensus centers on a few key themes for the rest of the year: low rates, low returns, policy limits, and volatility.

1. Low Interest Rates

Richard Turnill, BlackRock Global Chief Investment Strategist, notes that “We are living in a low-return world, with future market returns likely to be lower than in recent history.” With over 70% of the world’s developed-market bonds yielding 1% or lower, the hunt for yield has reached a fevered pitch.

chart-yielding

Chart courtesy of BlackRock

If you’re looking for a way to play continued interest rate declines, the iShares Barclays 20+ Yr Treas. Bond ETF (TLT) is the most popular choice. This ETF’s price rises as interest rates of U.S. Treasury Bonds decline. The TLT has returned 16% year-to-date, and over 20% over the past 12 months.

2. Low Returns

Directly related to the historically low interest rate environment is the phenomenon of borrowing potential future returns and dragging them into the present. As Turnill says, “This means investors who want higher returns must consider taking on greater risk — by increasing leverage or moving into riskier asset classes. This, in turn, propels valuations of risk assets higher, at the expense of lower projected returns in the future.”

If you’re daring enough to bet against the S&P 500 (SPY) while it hits new all-time highs, you can take a look at the ProShares Short S&P500 ETF (SH).

3. Policy Limits

Central banks the world over have been using monetary policy to forcibly inject economic growth into anemic markets. At first, these tactics (which include zero percent or negative interest rates, as well as asset purchases) worked well, but as time goes on, they inevitable lose effectiveness as markets adjust. Says Turnill: “Fiscal stimulus and structural reforms need to take over from monetary policy to foster growth, we believe.”

4. Volatility

Brexit-fueled equity volatility may have subsided, but currency volatility is at five-year highs. In fact, “…the dollar has started to correlate positively with global equities on a two-year rolling basis, reversing a long-standing negative correlation.” This means that the dollar is no longer gaining during short-term periods when stocks are lagging.

If you want to profit from potential volatility, you can buy the iPATH S&P 500 VIX Short-Term Futures ETN (VXX).

Conclusion

BlackRock is the best in the business when it comes to managing assets, so it pays to listen when their team speaks. While bearish equity narratives have abounded over the past 7 years and proven horribly false, many believe a turn in the markets has to come soon.

To read BlackRock’s full take on the state of the markets for the second half of 2016, click here.

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