Fund manager BlackRock remains bullish on stocks, particularly in the United States and in emerging markets, forecasting U.S. equity markets will offer annual returns of 6 to 8 percent over the next several years.
In a report released on Tuesday, however, the firm warned investors to prepare for an imminent correction in prices, following year-to-date gains of 17 percent on the Standard & Poor's 500 <.SPX> and of more than 60 percent on the benchmark MSCI index for emerging equity markets.
It also expressed confidence that low growth rates and low inflation will let central banks keep accommodative monetary policies that will feed the equities bull market for several years while healing the bond market at the same time.
We would not be surprised to see some sort of correction that could take the S&P back down to the 950 level, but we remain confident in our beginning-of-year prediction of 1,000 to 1,050, BlackRock's vice chairman Bob Doll and managing director Curtis Arledge said in the report.
The S&P 500 index is trading around 1,050 after reaching a low of 666 in March.
Volatility will remain high, BlackRock predicted, as stocks may be overbought and the economic outlook is still somewhat uncertain, but a great deal of cash remains on the sidelines awaiting an opportunity to enter the markets.
The fund manager currently favors U.S. and emerging stock markets. It says the higher-risk assets should outperform in the next several years, underpinned by the low growth, low interest rates environment.
FIXED INCOME HEALING
While BlackRock believes stocks offer more value than bonds, it also sees an attractive discount in lower-quality, higher-risk fixed-income assets, which should be selected carefully.
They are pricing in an economic environment more dire than we expect, particularly given that the spread sectors of the market will remain heavily supported by government programs for some time, the fund manager said.
Non-agency mortgages and commercial mortgage-backed securities are the most attractive sectors of this market, BlackRock said.
The headline risk associated with real estate-related investments has caused an extreme risk aversion to these sectors of the market, which has meant that these asset classes have not recovered as strongly as the rest of the market and, therefore, are cheap on a relative basis, it added.
On the other extreme, the fund manager recommends investors to underweight Treasuries and U.S. agency paper, as well as emerging market global bonds, after their recent strong performance.
(Editing by James Dalgleish)