##{"id":60204,"date":"2012-07-05T10:00:24","date_gmt":"2012-07-05T00:00:24","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/07\/05\/2012s-rocky-road-hasnt-ended\/"},"modified":"2012-07-05T10:00:24","modified_gmt":"2012-07-05T00:00:24","slug":"2012s-rocky-road-hasnt-ended","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/07\/05\/2012s-rocky-road-hasnt-ended\/","title":{"rendered":"2012’s Rocky Road Hasn’t Ended"},"content":{"rendered":"

\n\tFNArena's<\/span> Weekly Insights is usually the medium for Editor Rudi Filapek-Vandyck<\/span> to share his personal insights and analysis regarding financial markets, investment trends and global economic developments. Alas, Rudi hurt his lower spine while moving furniture last weekend and has only just been released from hospital. Painkillers and anti-inflammatory medicine alongside a subdued work pace will be on his menu for the immediate future. Which is why we have decided to dedicate this week's Insights to the views of Global Chief Investment Strategist for BlackRock’s<\/span> iShares<\/span> operations, Russ Koesterich<\/span>.<\/strong><\/em><\/span><\/p>\n

\n\tIn the greater scheme of things, FNArena<\/span> is a minnow and Blackrock<\/span> the industry giant, but when it comes to analysing<\/span> the present framework for financial markets and drawing conclusions for investors, there doesn't seem too much of a gap between the two, which is why we're happy to replace Rudi's usual market update with Blackrock's<\/span> vision for the second half of the year.<\/strong><\/em><\/span><\/p>\n

\n\tRudi's recovery permitting, next week should see a resumption to his personal market observations and analyses<\/span>. In the meantime, FNArena<\/span> hopes you will enjoy Koesterich's<\/span> analysis and conclusions (note there is the option of downloading a pdf<\/span> document with charts and additional data and information at the bottom of today's Weekly Insights).<\/strong><\/em><\/span><\/p>\n

\n\tBy Russ Koesterich<\/span>, Global Chief Investment Strategist for BlackRock’s<\/span> iShares<\/span><\/p>\n

\n\tIn 2012's second half, investors will face "a rocky road" compared with the year's first few months, with the potential "fiscal cliff" in the U.S. as well as Europe's ongoing turmoil both posing risk to a still weak global recovery, according to Russ Koesterich<\/span>, Global Chief Investment Strategist for BlackRock's<\/span> iShares<\/span> business.<\/p>\n

\n\t"At mid-year, the global economy is in roughly the same position as it was six months ago – an anemic recovery threatened by a European crisis," Koesterich<\/span> said, in a just-released update to his "iShares<\/span> Market Perspectives 2012 Outlook" originally published in December. As he did in December, Koesterich<\/span> currently assigns a two-thirds probability to continuing global expansion, albeit at a below-trend pace, and a one-third probability to Europe provoking another global downturn.<\/p>\n

\n\tAt the same time, he noted, "a number of risks have the potential to cause a global double-dip recession," including Greece's continuing problems, weakness in the Spanish banking system, and the potential hit of simultaneous tax hikes and spending cuts in the U.S. at year-end.<\/p>\n

\n\tIn particular, Koesterich<\/span> said, investors might be underestimating the possible impact of the U.S. fiscal cliff. "Investor behavior suggests that the risk is not currently discounted into asset prices," he said.<\/p>\n

\n\tEurope remains the major risk, Koesterich<\/span> noted. "While it appears, following the June 17 elections, that a Greek exit from the eurozone<\/span> is not as imminent as some had feared back in May, the election results do not change the underlying fundamentals," he said. "There is still a significant tail risk that Greece may eventually decide to exit the euro. Even if Greece remains in the euro, a bolder plan for tighter fiscal integration is proving frustratingly elusive.<\/p>\n

\n\t"Due to Europe's issues and the uncertainty surrounding U.S. fiscal policy, we expect volatility to remain elevated," he said. "We continue to advocate for a relatively conservative portfolio composed of high-dividend paying stocks and U.S. ‘spread products,' such as investment grade and municipal bonds."<\/p>\n

\n\tMid-Year Outlook Charts Market Directions, Offers Investment Ideas<\/strong><\/p>\n

\n\tKoesterich's<\/span> mid-year outlook, "What's in Store for the Second Half of 2012," outlines the major factors likely to shape market directions for the next six months and provides a near-term outlook for key global regions and asset sectors, with details of related iShares<\/span> investment products.<\/p>\n

\n\tAbsent a worsening of the crisis in Europe, economic growth in 2012's second half should be broadly in line with the first quarter -positive but subpar<\/span>– with U.S. growth around 2% and global growth from 3% to 3.5%, Koesterich<\/span> believes.<\/p>\n

\n\t"The U.S. is on marginally firmer footing and emerging market growth should begin to stabilize in the second half as the impact of 2011's monetary tightening wanes," he said.<\/p>\n

\n\tEurope's Risk Factors Stretch Beyond Greece<\/strong><\/p>\n

\n\tWhile investors enjoyed a temporary lull in Europe's problems in early 2012, courtesy of the European Central Bank's (ECB's<\/span>) massive injection of liquidity, the focus is once again on the Continent, Koesterich<\/span> noted. Koesterich<\/span> believes that the Greek banking system, Spanish banks, and political developments in Germany -Europe's ultimate creditor- will be among the key factors shaping Europe's fortunes as 2012 proceeds.<\/p>\n

\n\t"If the Greek banks continue to bleed deposits, the ECB<\/span> will need to provide more emergency assistance to prevent a collapse of the Greek banking system," Koesterich<\/span> said. "An even larger threat to Europe is Spain's need to recapitalize<\/span> its banking system, which is likely to cost at least EUR50<\/span> billion. To date, there is no credible plan."<\/p>\n

\n\tGermany also represents a critical swing factor for the European markets, Koesterich<\/span> noted, because that nation is under increasing pressure to accept a plan for mutualizing<\/span> European debt. "Germany's leadership has opposed such a move to date, but any development toward the pooling of at least some of Europe's debt obligations would be a positive for the markets," he said.<\/p>\n

\n\tUncertainty will yield continued stress in the financial system, Koesterich<\/span> believes. "We don't see another recession or a Greek exit as foregone conclusions," he said. "But Europe is no closer to a political, economic or financial resolution to its problems.<\/p>\n

\n\t"If Greece cannot abide by the terms of its austerity package, or if the Spanish banking bailout proves inadequate or unwieldy, then Europe's chronic stress is likely to erupt into a crisis," he said.<\/p>\n

\n\tA Looming "Fiscal Drag" in the U.S.<\/strong><\/p>\n

\n\tIn the U.S., potential year-end tax hikes and spending cuts could create more than US$600 billion in "fiscal drag," or the equivalent of roughly 4% of GDP.<\/p>\n

\n\t"Growth in the U.S. is unlikely to be better than 2%, so if the fiscal drag were to occur, we believe a double-dip recession becomes much more likely," he said. "A compromise that would avoid the fiscal drag is by no means assured, yet investors are placing a very low probability on the drag actually occurring, partly evidenced by the fact that 2013 growth forecasts have remained remarkably stable over the past nine months."<\/p>\n

\n\tAbsent a clear consensus coming out of this year's elections, November and December are likely to be marked by heightened volatility as investors grapple with the odds of a last-minute compromise, Koesterich believes.<\/p>\n

\n\tWith Markets "On Edge," Where to Invest?<\/strong><\/p>\n

\n\tMarkets are likely to remain "on edge" throughout the remainder of 2012, Koesterich said. "We prefer the relatively low beta of high dividend stocks-both in developed and emerging markets-and using any market weakness as an opportunity to add to longer-term positions in emerging markets."<\/p>\n

\n\tIn addition to offering attractive yield, dividend stocks are generally less volatile than the broader market, Koesterich said. "Since the correction began earlier this year, dividend-focused indices have generally outperformed the broader averages," he noted.<\/p>\n

\n\tKoesterich continues to advocate overweighting emerging markets. The continuing argument for the emerging markets rests on several factors including a longer-term trend toward less volatility, stronger economic growth, falling inflation and more compelling valuations, he noted. In late May, the MSCI Emerging Markets Index was trading for less than 11x earnings, the bottom quintile of its historical range.<\/p>\n

\n\tIn the fixed income space, Koesterich has favored municipal bonds since late 2010. "Municipal yields are still at a significant premium to comparable Treasuries and there is little evidence of the feared meltdown in municipal finances," he said.<\/p>\n

\n\tHe also continues to prefer U.S. corporate bonds, particularly investment grades. "While high yield was the flavor of the month in the first quarter, we believe historically high spreads and less risk favor investment grade in the coming months," he said.<\/p>\n

\n\tThe views expressed are the author's and not by association FNArena's (see our disclaimer).<\/p>\n

\n\tThe full document in pdf format, including charts and extra-information, can be downloaded via the following link: http:\/\/us.ishares.com\/resources\/market_commentaries\/market_perspectives.htm<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"