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There is no reason to cut and run in this market

  • Politics may have left some investors ready to cut and run but this isn't the time to get risk averse.
  • The BlackRock GPS suggests the global economy has entered a period of sustained above-trend growth.
  • Fundamentals and corporate profits look solid.
  • Investors should be in it for the long haul. It will pay — literally.
Don Johnston | Getty Images

Attention spans may well be shortening, but evidence suggests that staying engaged and focused on the long term still pays. Literally.

Investors are not immune to an epidemic of short-termism. Figures from the World Bank indicate that average holding periods for stocks are four times shorter today than they were in 1980.

Investors are also more risk averse. BlackRock analysis reveals that risk taking in the market is well below previous peaks. And fund flows suggest the post-crisis preference for bonds over stocks has yet to reverse.

These tendencies are no doubt exacerbated by a sustained period of short-term political risks over the past year. But the net result of playing it short and safe is that investors may be compromising their long-term goals.

Opportunity lost

Anticipation of seminal political or other events often triggers one of two investor reactions: an inclination to retreat from the markets, or a bold and often futile attempt to time them.

The past year provided sundry reasons for an investor flight response: Brexit last June, the U.S. election in November, the French elections a few weeks ago and most recently the UK election. This is overlaid with ongoing uncertainty over structural reforms in Europe and relentless political discord in the U.S.

Markets have remained calm despite these concerns. Ironically, some investors view current low market volatility as a sign of complacency - and yet another reason not to invest. But retreating to the sidelines comes with an opportunity cost.

Our analysis of BlackRock's capital market assumptions indicates that an investment in global equities is expected to deliver a real return far in excess of holding an investment in cash over the next five years.

Don't try to time the market

Equally counterproductive, and decidedly more difficult and perilous: trying to time the market. We don't need to look too far back for an illustration:

Global equity markets as measured by the MSCI World Index suffered a sharp decline in the two days following the UK vote to leave the European Union, but investors seeking to buy the dip had just 13 trading days to do so. Markets rose back above their pre-Brexit levels on July 12. The market reaction to this month's general election was even more challenging to time. Domestic-oriented stocks in the UK's FTSE 250 index bounced back from an initial fall within hours after the unexpected result, as investors digested what the election outcome may mean for Brexit.

The reality is that most investors have long horizons, saving for retirement or for future liabilities such as university fees, and are better served by taking a long view. A look at rolling 10-year periods of the MSCI World index since 1970 reveals that only 2 percent of those periods have generated negative nominal returns; all were linked to the global financial crisis.

We do not see conditions in place for negative long-run returns going forward. In fact, fundamentals are encouraging.

Fundamentals matter more

Investors would do well to look through short-term risks, particularly political, and focus on the long-term drivers of return. If anything, the events of the past 12 months reinforce that view. Despite seemingly relentless political stressors, global economic and stock market fundamentals have not been dramatically affected.

Reflation is alive and well, and encouraging economic stability across the world. Our BlackRock GPS, which tracks the global economy, suggests we have entered a period of sustained above-trend growth. The current economic cycle, while unusually long and slow, appears to have ample runway. Our analysis suggests its remaining lifespan can likely be measured in years, not quarters.

The corporate earnings picture is brightening globally. Whereas share buybacks and cost-cutting helped propel bottom-line growth in recent years, first-quarter sales growth in the U.S. appeared the strongest in more than five years. Solid earnings and improving revenues — particularly among cyclical companies — are supportive of global growth.

Equity valuations should find support in sustained economic expansion and in low real bond yields globally. In an environment where government bonds face a less accommodative monetary regime and a macro shift toward higher yields, we believe investors are being compensated to take risk in stocks.

Markets will always provide reasons for worry. Indeed, the sharp fall in Brazilian assets last month as political uncertainty erupted provided a timely reminder that investors must not be complacent about the potential for spikes in volatility and drawdowns. But it is important to remember that periods of short-term market volatility are the norm, even in an economic expansion. We see no immediate red flags to suggest impending sustained market dislocation.

Low volatility readings of late have stoked speculation of an inevitable mean reversion. Whereas high readings on Wall Street's fear gauge, the VIX, have been reliable buy signals, the opposite is not the case. Low volatility historically says little about the direction of future equity returns.

Ultimately, timing markets is hard — and avoiding them costly. Most investors would do well to focus on the long term. Seeing the forest through the trees can pay its own dividends.

Commentary by Richard Turnill, global chief investment strategist at BlackRock.

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