Fundamentals, Not Central Banks, Gain Investor Focus

Fundamentals will once again become the real drivers of portfolio returns as central bank stimulus is pared back, according to BlackRock Investment Institute’s md-year 2015 outlook.

The paper, published today, said that factors like productivity and earnings growth will be more important this year, however flagging productivity has affected growth rates and corporate profits.

"Heady valuations in some markets and uncertainty over the pace of Fed tightening argue for caution and selectivity in countries, sectors and securities," said Ewen Cameron Watt, global chief investment strategist for BlackRock.

Cameron Watt pointed to richly priced government bonds and rising currency volatility, and said he expects increased equity volatility. Although European Central Bank stimulus has pushed bond yields to record lows, higher yield can still be found in Portuguese sovereign bonds and subordinated bank debt.

Attention Turns To Interest Rates

The U.S. Federal Reserve is expected to raise short-term rates in the autumn, which is forecast to hit short-maturity bonds, but “[…] any rise in long-term rates should be subdued by yield-hungry buyers”, according to Russ Koesterich, global chief investment strategist at BlackRock.

Raising rates in the U.S. is also likely to hit U.S. stocks, said Koesterich, especially dividend-paying, low-volatility sectors like utilities and consumer staples, and so he prefers cyclical sectors like technology and financials. The Vanguard S&P 500 UCITS ETF – USD (VUSD) is up over 1.1 percent so far this year.

Greek Drama Continues

European markets have suffered tremors due to the Greek crisis. However, the markets jumped around 1.2 percent today after European leaders agreed a further £25 billion bail-out for Greece as long as the country implements certain reforms by Wednesday.

Shaun Port, CIO at wealth manager Nutmeg, said: “"Market reaction so far is muted, given the many hurdles to overcome in the next few days.”

European equities overall have not been hit too hard by Greece so far this year, with the iShares Euro Stoxx 50 UCITS ETF (EUE) delivering over 6.6 percent in GBP terms.

Cameron Watt said Greek drama has served to obscure more important drivers of returns, and while it is too soon to call an end to QE, investor focus will shift away from central bank policy.