The global equity markets have "powerful factors working in their favour", particularly in the US and Asia ex-Japan markets, according to Bob Doll, BlackRock's US-based CIO for global equities. The key to getting it right, he says, is taking a selective approach to investing.
Equities have rallied strongly since early March, but nevertheless remain volatile. Doll credits technically oversold conditions, aggressive global policy actions, and a general sense that the global economic recession may be moving past its period of great weakness for the recent rally.
Equity markets appear to be anticipating an economic recovery, but this is where it gets tricky because what's in store is still anyone's guess.
"It is important to recognise that any recovery is likely to be muted and that equity markets will remain highly sensitive to economic data releases," says Doll. "It would be premature to suggest that a new bull market has emerged or that we have seen the end of the see-saw patterns that have been in place since last fall."
From a technical perspective, the current rally has been marked by strong momentum and expanding volume on the upside, and diminishing momentum and volume on the downside, Doll notes. The more cyclical areas of the market such as the consumer discretionary and technology sectors have been outperforming, as have emerging markets when compared to developed markets -- trends that occur when recoveries begin.
Doll expects volatility to persist, noting that it would not be surprising to see additional selling squalls in the months ahead. Nevertheless, while markets are certainly not out of the woods, he believes that global equities should continue to move higher over the course of the year.
Compared to the Western economies, Doll believes many Asian governmental and corporate balance sheets are relatively strong as a result of lessons learned in the Asian financial crisis of 1998. Governments can actually afford significant fiscal stimulus packages. Banking systems are robust compared to their Western counterparts, and banks should be able to take care of non-performing loans with existing capital and without incurring large impairments to their book values.
Doll notes, however, that while he is generally upbeat about most Asian markets, he sees more downside risks for Japanese equities. Thanks in no small part to the recent relative strength of the yen, Japanese stocks have been posting some better performance of late, but Japan continues to be plagued by significant economic weakness that has the potential to act as a drag on the markets, he says.
Exports have been a trouble spot in the Japanese economy for some time, but the more alarming development has been the accelerating declines in other parts of the Japanese economy. Recent Tankan surveys of business confidence have shown that the outlook for both manufacturers and service companies is extremely weak, and managers have been expressing the view that workforces will still need to be reduced further. On the consumer side, both cash earnings and retail sales continue to worsen as well.
Outside of Japan, however, there is abundant liquidity in the region and most Asian currencies operate a full or partial peg to the US dollar. Low interest rates and quantitative easing in the US provides a classic reflationary stimulus to these Asian economies and equity markets.
"There are particular pockets of strength in Asia," Doll says. "Sentiment and sales remain firm in the Chinese consumer sector. China remains a key overweight since the massive stimulus programme enjoys good potential for success in offsetting the effects of reduced export demand. In Hong Kong, the property market is showing signs of stabilisation, which is also providing opportunities. "
BlackRock's global equity investment teams generally favour companies aligned with Asian domestic consumption rather than those driven by exports. Consumption in the US and Europe is unlikely to recover to its previous levels for some time, and as a result, domestic market consumption will be a greater economic growth driver in the future. Additionally, the global environment remains challenging for Asian exports. Sustained recovery will not be possible until consumer demand in the US and Europe resumes and this still appears some way off.
