Based on one month-correlations, BlackRock analysis has found that bonds and stocks have broken from their traditional inverse pattern and are trading in greater synchronicity.
In its Global Investment Outlook for Q4 2016, the asset manager noted that while longer-term correlations between the asset classes are still negative, there may be some indication that this will change.
In particular, BlackRock’s analysis suggests that there is a rise in correlation between equities and bonds around expectations of the Federal Reserve raising rates.
And BlackRock contends ‘bond proxies,’ high yielding equities that have been increasingly sought after in a period of low, and in many cases, negative rates, will be especially vulnerable to this increased synergy.
To combat the harmful effects of bonds and equities moving in tandem, investors should look to gold as a natural diversifier and cash as a portfolio buffer, BlackRock advised.
Like countless others in the industry, BlackRock lists the US presidential election a chief risk to take into account toward the end of the year, particularly if Donald Trump wins.
But it does not underestimate the potential volatility from other political events on the European stage, including the Italian Referendum and the EU-Turkey refugee deal.
BlackRock views China, on the other hand, as less of an immediate threat, at least in the short-term. China has managed to achieve a ‘Goldilocks depreciation,’ and has been able to use a weaker yuan to get a handle on the deflationary concerns threatening its industrial sector.
“Investor sentiment toward Asia in general is improving: the region’s export engine shows signs of gaining momentum, and growth-enhancing reforms are taking place,” the firm said.
“As a result, we have become more bullish on Asian equities, in particular selected Indian, Indonesian and Hong Kong-listed Chinese shares.”
However, BlackRock stressed that medium-term risks, such as a credit bust and a renewed downward pressure on the yuan could not be discounted.
