(Australian Associated Press)
Global equity markets will continue their rollercoaster ride amid heightened economic and political uncertainty.
Britain’s vote to leave the European Union has triggered market volatility, and further uncertainty could exacerbate already poor corporate earnings trends, according to BlackRock, the world’s largest asset manager that provides financial guidance.
US earnings have been flat for a year, while Japanese earnings have turned negative and emerging markets earnings are showing only tentative signs of recovery, BlackRock said.
Fears about the implications of Brexit, coupled with the ability of central banks to steer economies through the uncertainty, plus upcoming elections in the US, Germany and France, will drive future market moves.
Belinda Boa, chief investment officer of BlackRock’s Active Investments for Asia Pacific, said it is a “very difficult” time for markets.
“The only thing that is certain is uncertainty,” she said.
“2016 is turning out to be a spectacular anti-establishment year, geopolitical risk remains extremely elevated … and we still see elevated risks around terrorism and risks around the Middle East.”
BlackRock expects uncertainty to continue for some time, which has “enormous implications” for investors.
That is also likely to mean a lot of action from central banks, including interest rate cuts and further quantitative easing. This will all drive yields lower, Ms Boa said.
State Street’s asset management business says investors should be prepared for ongoing market volatility.
“We expect that spikes in volatility triggered by a range of geopolitical factors will continue to characterise markets for the remainder of the year,” Rick Lacaille, State Street Global Advisor’s global chief investment officer, said.
“The Brexit vote outcome will be a primary source of volatility, particularly in the short term, but also in the coming months as the process unfolds.”
The bleak international environment could see foreign investors turn to Australia, where bond yields are well above those in most developed markets, according to Steve Miller, managing director of BlackRock Australia.
“People might look to Australia in terms of generating income or generating yield,” he said.
While Australia faces a possible downgrade of its coveted AAA credit rating by Standard & Poor’s down the track, it has a stable economy, Mr Miller said.
SSGA says investors may want to consider volatility strategies that limit downside risk and allow them to participate in any upside risk.
To target a seven per cent return in 2016, investors need to construct a more complex portfolio, with higher standard deviation, than the conservative 60 per cent fixed income and 40 per cent equity portfolio needed to target the same return 10 years’ ago, according to SSGA.
Investors should consider a raft of measures, including reducing fixed income but extending the duration, and to take advantage of correlations between equities and bonds and boost exposure to growth assets.