- BlackRock lowered its global growth outlook, based on expectations that trade and geopolitical frictions will continue.
- The firm said central banks are responding to the weaker outlook, and are loosening policy, creating a constructive environment for U.S. and European stocks.
- BlackRock upgraded emerging market debt but no longer favors emerging market equities, lowering them to neutral from overweight as the outlook for global growth dimmed.
BlackRock downgraded its global growth outlook for the second half, and while it still sees a good environment for U.S. stocks, it no longer favors emerging market equities.
The outlook has weakened as a direct result of geopolitical and trade frictions, but that has also increased the potential for easier policy by central banks, including the Federal Reserve and European Central Bank. For that reason, the outlook for U.S. stocks remains positive, and the firm upgraded European stocks from negative to neutral. Emerging market stocks were lowered from overweight to neutral, but it upgraded emerging market debt.
"Our view on China has become less positive, and as a result, the rebound we were expecting in Europe is not in the cards anymore. It's a downgrade in the broader global picture, and it's driven by the European and China view," said Jean Boivin, head of the BlackRock Investment Institute.
Boivin said the firm sees the outlook as more risky but central banks are providing a backstop. "Despite the fact we've downgraded the outlook, we are positive on European assets. We were underweight and we moved up to neutral in European equities because of what we see as a pretty significant shift in the ECB," he said.
Treasurys also remain attractive, even as yields have fallen to multiyear lows. "Even at these low yields, we think fixed income is providing ballast in our portfolios. It's protection," said Boivin, noting he also liked emerging market debt.
The outlook for the U.S. economy is for a lowered pace of growth, at about 1.8% in the second half of the year. "[Central banks] are creating a benign environment. We don't see recession risk as anything that's relevant for this year. Based on that, the next few months do look pretty constructive for markets," he said.
BlackRock sees the tariff and trade tensions as part of a bigger concern for global markets. "We think trade has been used for achieving objectives that are not truly about trade. The Mexican tariffs were an example of that," he said. The fact that President Donald Trump threatened to put tariffs on all Mexican goods because of immigration issues is a departure from the way tariffs have been used for trade purposes, and it creates more uncertainty.
"I think tariffs and trade is where the war is being fought, but it's broader. It's about national security. It's about tech dominance. It's not just about tariffs on one sector or the trade balance," he said.
Boivin said tariffs are making costs higher for corporations and forcing some companies to change their supply chains altogether. For that reason, inflation could be a surprise the markets aren't expecting, at some point after this year.
The uncertainty from trade wars should continue for some time. "We see the ebbing and flowing," he said. "We're going to feel the intensity go up. Then there's going to be a truce. We think that's going to continue."