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Move Into More Defensive Areas: BlackRock

With economic growth slowing in Europe and hopes of a recovery in the second half of 2011 dashed, investors should focus on value stocks and move from cyclical areas into more defensive areas which offer high dividend yields, Nigel Bolton, head of European equities at BlackRock told CNBC.

Businessman with crystal ball
Fredrik Skold | The Image Bank | Getty Images
Businessman with crystal ball

“We’ve come to quite a significant change in the markets. It’s been a big shock to investors. A lot of investors a couple of months ago were expecting a second-half pickup and have really been wrong-footed over the last six weeks or so,” Bolton told CNBC.

“There’s a big shift going on from more cyclical into more defensive, more quality areas. At the moment it’s the right thing to be doing,” he said.

One of the things investors should do is look at the dividend yields available on high quality assets, according to Bolton.

“You don’t have to go into low-quality companies to pick up 5.5, nearly 6 percent dividends,” he said, citing Royal Dutch Shell as an example.

“My focus for the next 3-5 years is going to be much more about the return from the dividend yield. It’s going to be less about the growth story,” Bolton said.

With uncertainty surrounding the economic recovery, he advised owning “quality and safety”.

It was too early to tell whether company earnings would disappoint, and a lack of clarity from China on whether to expect more fiscal tightening further added to that uncertainty.

“In Germany at the moment we have seen a bit of a downturn in orders in the last few weeks but it’s the holiday season. Is it just that?” Bolton asked.

“Until we get into September it’s going to be very difficult to get any clear guidance from companies and to get a clear picture as to what actually is happening.” BlackRock believes we are seeing a slowdown with a risk of a “financial freeze”.

“If you look at the corporate sector, balance sheets are pretty strong, we don’t see big overhangs of inventory. But there is this leftfield risk which is worrying people which is reflected in the CDS in the banking sector," Bolton said.

“We’re in an environment we haven’t really seen for 60 years. The politicians are struggling, and having had two rounds of QE (quantitative easing) in the US you have to ask the question: what has that really done for US growth,” he said.