Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Roelof Salomons – Chief Investment Strategist for the Netherlands, Ben Powell – Chief Investment Strategist for the Middle East and APAC and Devan Nathwani – Portfolio Strategist all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Going global: We see opportunities in global stocks trading at attractive relative valuations with potential catalysts for price appreciation – like in China and Japan.
Market backdrop: U.S. stocks hit all-time highs. U.S. 10-year yields rose further after the U.S. core CPI data prompted markets to trim expectations for Federal Reserve rate cuts.
Week ahead: This week, we expect the European Central Bank to cut interest rates. We think it has more room to cut rates than the Fed because it tightened policy more.
China’s share surge shows the upside of keying on opportunities in global stocks when clear catalysts emerge. We keep our U.S. equity overweight on the artificial intelligence (AI) theme broadening. Outside the U.S., we favor markets where we have high conviction. We’re overweight Japanese stocks on a solid macro outlook and corporate reforms. We stay overweight UK stocks with less conviction. We upgrade UK gilts and see room for sharper policy rate cuts than markets expect.
China is the latest example of how cheap valuations can turn into a stock market rally once a catalyst emerges. Chinese shares have surged since the September politburo meeting on hopes that major fiscal stimulus may be on the way. A lack of details so far has disappointed some investors, so we eye policy announcements for more clarity. This potential exists elsewhere, waiting for a catalyst to give a spark, we think. But selectivity is key. We see a widening gap in economic performance and equity valuations across regions – a function of a more volatile macro backdrop and uneven restart coming out of the pandemic. See the chart. We still like U.S. stocks and the broad AI theme as corporate earnings growth expands beyond tech. Yet fears over stretched valuations can drive brief selloffs. This calls for considering global exposure where we see cheap valuations and potential catalysts.
Staying nimble allows us to seize on opportunities in global equities when catalysts emerge. China’s signal on policy stimulus prompted us to go modestly overweight, especially given depressed valuations. Details have been scant, so we could change our view if future announcements disappoint. We still think China faces long-term, structural challenges – like economic and geopolitical competition with the West, government debt and population aging. We have stayed overweight Japan stocks on a sunnier macro backdrop and corporate reforms driving strong earnings and shareholder returns. We trimmed our overweight in August due to the potential drag on earnings from a stronger yen and Bank of Japan policy missteps – yet we stay positive.
How we’re staying selective
Even in regions where the growth outlook is more challenging, we see selective investment opportunities. With 11% gains this year, European stocks have lagged major markets – yet European banks have surged 31% and we still like the sector as we have since the start of 2024. We have less conviction in UK stocks on a soft economy and heading into the new government’s budget announcement, yet we stay overweight for now. We go overweight UK gilts as we see the Bank of England having to cut policy rates more than markets are pricing given the soft economy.
We lean into risk yet monitor signposts that could cause us to change our views. Geopolitical risk is elevated as tensions flare in the Middle East. Regional escalation could drive oil prices higher, highlighting this is a world shaped by supply constraints. We have seen oil price spikes drive bond yields higher, showing long-term bonds still aren’t providing reliable portfolio diversification, in our view. This makes quality key in fixed income, we think. The U.S. election will have global ramifications, especially for key trade partners like Mexico. Yet mega forces, structural shifts impacting returns now and in the future, are driving opportunities beyond the near-term risks. For example, the rewiring of supply chains is benefiting multi-aligned trading partners like Vietnam and Indonesia, both seeing a significant increase in trade and investment flows.
Our bottom line
We stay nimble to seize high-conviction global opportunities. We recently turned modestly overweight Chinese equities and stay overweight Japanese and UK equities. We up UK gilts to overweight and stay cautious on U.S. Treasuries.
Market backdrop
U.S. stocks hit all-time highs, with tech shares leading gains, as the Q3 earnings season kicked off. U.S. 10-year Treasury yields climbed further to their highest since July near 4.10%, up about 50 basis points in the past month. U.S. core inflation topped expectations in September, showing sticky services inflation and leading markets to trim expected Federal Reserve rate cuts. China onshore shares fell 3% last week, forfeiting some recent gains as investors eye fiscal stimulus details.
We expect the European Central Bank (ECB) to cut interest rates at its policy meeting this week. September core inflation was below ECB projections, indicating inflation is still on track to hit the central bank’s 2% target. We think the euro area’s substantially weaker growth and employment indicators will push the ECB to cut rates again in October. The ECB will likely remain focused on incoming data but it has more room to cut than the Fed because it tightened policy more, in our view.
Week Ahead
Oct. 14: China trade data
Oct. 15: UK employment data
Oct. 16: UK CPI
Oct. 17: ECB policy decision; Philly Fed business index; Japan trade data
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