Recession Ahead?

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After last week’s sell-off, many investors are worried that another global recession could be on the horizon. Russ provides his take, explaining why growth is slowing, rather than collapsing, and why now is a good time to give high yield bonds another look.

Risky assets continued to sell-off last week partly thanks to more evidence of a slowdown in the global economy.

The International Monetary Fund (IMF), for instance, reduced its estimates for global growth, and many investors are now worried that another global recession could be on the horizon.

But while global growth is likely to remain meager and below trend, it’s not collapsing. As I write in my new weekly commentary, “The Sell-Off Continues, But an Opportunity Appears,” though growth in most of the developed world, as well as in China, does appear to be decelerating, there are a few bright spots, including India and the United States, as diverging growth remains a major trend in the global economy.

Despite the recent global growth scare, a relatively strong U.S. economy continues to suggest that the Federal Reserve (Fed) will tighten monetary policy sometime in the first half of 2015. This is creating an ironic twist to the selling: soft growth globally, but a U.S. economy strong enough to induce some normalization in monetary policy.

In addition, many market watchers are concerned about slowing growth in the Eurozone. While the region is unlikely to boom anytime soon, there are some signs that any further slowdown there should be modest. A few countries, notably Spain, are benefiting from structural reforms, and demand for consumer credit appears to be rising. In addition, a weaker euro should help European exporters and provide some tailwind for the eurozone.

So what does this mean for investors’ portfolios? Investors should be positioned for a slow growth environment, not another recession, and should consider raising allocations to assets that can still do well amid meager growth.

In particular, investors may want to take on some selective risk in asset classes that have become less expensive. One example of such an asset class: U.S. high yield.

High yield bonds have come under pressure lately, and as a result, are now looking relatively attractive. Spreads recently widened out to the highest level in a year, indicating that high yield now offers better value and yield. In short, given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market.

 

Sources: BlackRock research, Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.  Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

 

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