New research from asset management giant BlackRock says shares should outperform bonds in the remainder of 2013, highlighting three key factors which it believes will move markets in the remaining months of this year.


  • Global monetary policy is diverging and an era of easy money is slowly ending. Distorted markets are resetting but could overshoot.


  • The Fed is ready to wind down bond purchases if US economic momentum holds. Economic data and jobs numbers take centre stage.


  • Risks are increasing, including a potential emerging market funding crunch and spike in real interest rates. Volatility is back.


The so-called 'tapering' of the US Federal Reserve's (Fed) $85 billion-a-month asset purchase scheme has been a key factor in the performance of the market in the past few months. When Fed chairman Ben Bernanke first hinted at reducing this stimulus on 22 May he prompted a significant wobble in global exchanges. The chart below shows how the US unemployment rate – a key yardstick for Bernanke and his colleagues – is approaching the level where quantitative easing might be exited.


By contrast, BlackRock notes, the Bank of Japan is set launch a $1 trillion-plus 'monetary booster'. The graphic below summarises the key policy events in Europe, Japan and the US in the second half of the year.


The report says to expect heightened volatility and adds investors should favour equities over bonds with an increased focus on cyclical stocks rather than crowded income plays and defensives.

The chief investment strategist at the BlackRock Investment Institute, Ewen Cameron Watt, says: 'We are approaching a fork in the road for global monetary policy and have had a rehearsal of the impact on markets.'

Issue Date: 19 Jul 2013