BlackRock’s 2014 Outlook—The List: What to Know, What to Do

2014 OUtlOOk T H E L I ST What to Know, What to Do

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2014: (Mostly) Moving in the Right Direction

Asset Class

2013 Returns

2014 Outlook

U.S. Stocks +29.1%

InternationalStocks

+21.0%

Emerging Markets Stocks -1.2%

10-Year U.S. treasury Yield 2.75%

A STROng 2013…AnD POTEnTIAL uPSIDE fOR 2014

Source: Bloomberg. As of November 30, 2013. U.S. Stocks are represented by the S&P 500 Index, International Stocks by the MSCI EAFE Index, and Emerging Markets Stocks by the MSCI Emerging Markets Index. Past performance does not guarantee future results. You cannot invest directly in an index.

Investment ActIons for 2014

Rethink Your Bonds

Seek growth, Manage Volatility

generate Income, But Don’t Overreach

In 2014, we see a world of opportunities—even if they often appear elusive. While uncertainty is high, your goals haven’t changed. You still need to save for retirement or find a way to get the income you need from your investments. We understand that investors feel overwhelmed by the challenges and don’t know what steps to take.

that’s why we collected our 10 best ideas for the year ahead, which we call the list. We offer five “what to know” items and five “what to do” ideas, each with a specific takeaway—designed to help you navigate the markets in 2014.

So what to expect in 2014? Many of the conditions of the last few years—slow growth, low interest rates, and very low inflation—are likely to persist. Not an ideal environment, but one that should support further gains in stocks, and perhaps hints at a virtuous cycle of global growth that could be possible if the stars align.

However, there are risks to consider. We expect interest rates to climb, which could expose traditional bonds to potential losses. Given the strong run-up in stocks over the past few years, now is a good time to consider diversifying outside the U.S. Moreover, political dysfunction in Washington (and geopolitical events) presents a risk of increased volatility.

Where does this leave investors? Although many continue to sit on the sidelines, we believe the risks of not investing—missing out on market gains, having your cash holdings erode due to inflation—outweigh the risks of being in the market. there is no free lunch, and there are risks to be aware of (and to manage), but meeting your financial goals means taking steps today.

And the list is our guide to helping you do exactly that.

W H A T T O K n O W , W H A T T O D O [ 3 ]

the BLAcKrocK LIstWhat to know—and Do—in the Year Ahead

Wh

At

to

Do

Wh

At

to

Kn

oW

Stick With Stocks…for now

Seek greater growth Opportunities Abroad

Bond Buyers Beware: Once Thought Safe, now Risky?

Consider Munis for Tax-Exempt Income

go Beyond Traditional Stocks and Bonds

Interest Rates: Higher, But not Through the Roof

Employment: Jobs Are growing, But Wages Are not

More Policy uncertainty Means More Volatility

The Economy: growing, Albeit Slowly

Inflation: The Risk Is to the Downside

Ke y tAKeAWAyWhAt to KnoW

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S L O W g R O W T H

We expect U.S. economic growth to improve in 2014. With the Federal Reserve’s easy-money policies as a tailwind, stronger household balance sheets, a healing housing market and lower energy prices should bolster corporate and consumer confidence and support a pickup in growth.

Risks remain, however. First, the level of dysfunction coming out of Washington, D.C. presents a significant risk to both the economy and markets. Given the ongoing weakness in the labor market, including subdued wage growth, we are cautious about how strong the economy could be.

All told, we believe the U.S. economy will edge past the 2% growth rate that has defined the post-recession environment and come in at around 2.5%. Global growth should accelerate from 3% in 2013 to around 3.5% next year. this should be a positive for stocks, and is also a range that provides the Federal Reserve with some flexibility in managing policy.

the Economy: Growing, Albeit Slowly

The U.S. economy

should edge past the

2% growth rate of

recent years, with global

growth also improving—

good news for stocks.

Fed policy, healing housing markets

and lower energy prices should all

support modest economic growth and

equity markets.

Ke y tAKeAWAy WhAt to KnoW

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RIS In g I n T E R E S T R AT E

S

Modestly stronger growth should lead to slightly higherinterest rates—but we do not expect a sharp or rapid acceleration. As the Federal Reserve begins to slow its extraordinary bond-buying program, we believe the 10-year treasury yield will modestly climb around 0.5% by the end of 2014.

Even a small increase in interest rates can erode the value of your bonds and hit your net worth, as well as increase your cost of borrowing for everything from homes to cars.

to avoid these sorts of negative economic consequences, the Fed will likely promise to keep short-term interest rates low for some time.

Interest Rates: Higher, But Not through the Roof

Question for

your portfolio:

Are you prepared for

a higher-interest-rate

environment?

We don’t expect a sharp rise in rates, but even

a small increase would weigh on your

bonds and possibly your net worth. time to

rethink your bonds.

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Inflation remains close to historic lows, not just in the United States but also in other large developed markets. We don’t see that changing in 2014. If anything, the risk in some developed regions is actually deflation.

It is a question we often hear from investors: Why is inflation so low? Essentially, there are three reasons: wages are not growing very strongly, factories still have excess capacity (which means they don’t charge higher prices for their goods) and lending activity remains depressed.

Some developed regions, notably Europe and Japan, will continue to flirt with outright deflation. None of this suggests that inflation won’t eventually increase. But for now, conditions indicate inflation is likely to remain low, at least for the next year or so.

Inflation: the Risk Is to the Downside

Be cautious of asset classes like tIPS,

commodities and gold that are often used

to protect against inflation.n

E

A R - f L AT I n f L ATIOn

Question for

your portfolio:

How should you invest

in a slow-growth,

low-inflation world?

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Ke y tAKeAWAy WhAt to KnoW


We should see more people getting jobs in 2014

and the unemployment rate should continue to go down.

However, that good news is tempered by the strong possibility that U.S. wage growth is likely to remain subdued. While improving economic growth may provide some upward pressure on wages, factors such as demographics, technology and global labor competition are long-term trends that are working to keep income levels low.

Why does this matter? If income growth remains weak, household spending is also likely to remain soft. And that means consumer spending is not the driving force for the economy like it once was. Unless we see a drop in savings or a pickup in borrowing, this factor could mean we see slower overall growth for a longer period, and potentially, lower stock market returns for certain companies most dependent on consumer spending.

Employment: Jobs Are Growing, But Wages Are Not

Slow income growth and sluggish consumer spending could make consumer

discretionary companies less attractive. It also

may keep economic growth in low gear

for some time.

Weak wage growth

is bad news for the

stocks of companies

that rely on discretionary

spending by consumers

—better value can be

found elsewhere.

PR

E S S u R E O n W A g ES

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Centered in Washington, political partisanship anddysfunction continue to represent a risk for the economy and the markets. We may see ongoing political wrangling around budget and debt issues, and topics such as implementing the Affordable Care Act are likely to promote additional uncertainty. 2014 also brings with it the midterm elections—an environment that is certain to promote bitter partisanship.

Meanwhile, a trend of growing populism—not just in the U.S. but globally—which can lead to economically unsound policy decisions, represents an additional risk. As always, geopolitical risks lurk as well—we would cite escalating tensions in Asia and the Middle East. All of this creates the potential for increased market volatility.

Expect volatility to increase if—

or when—political dysfunction again emerges.

this is also one reason why it makes sense

to be diversified outside the U.S. and

consider minimum volatility strategies.

More Policy Uncertainty Means More Volatility

Should Washington’s

political drama continue,

it likely means higher

volatility—a reason to

look outside the U.S. for

investment opportunities.

PO L IC Y u n C E R TA In

T Y

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Ke y tAKeAWAy WhAt to Do


Stick With Stocks...For Now

U.S. stocks had an extraordinary year in 2013, particularly after accounting for the fact that economic growth has disappointed. Given the magnitude of the gains, investors are increasingly concerned that global stocks are once again getting overvalued, if not in an outright bubble.

Our take: stocks are no longer cheap, but are not in a bubble. there are some areas of the market that we believe are unjustifiably expensive (U.S. small caps are a chief example), but overall we think prices still can go higher. It is important to remember that stocks still represent a better value than cash and bonds. In short, we would remain overweight equities.

However, there is an important caveat. Further gains in the market will need to come alongside growth in corporate earnings. Given the environment we described—slow economic growth, sluggish wage growth, lackluster consumer spending—that may be hard for companies to achieve. If we do see market gains without a corresponding increase in corporate earnings, we would take that as a warning sign.

Equities are no longer

a bargain, but we

believe investors should

still overweight stocks

for the time being.

We would still overweight equities.

If you’re out of the market, there’s still time to get off the sidelines.

Y O u R P O R T f O L I O

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Ke y tAKeAWAyWhAt to Do

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Y O u R P O R T f O L I O

the United States is one area of the world that is lookingfully valued. However, outside the U.S., stocks appear more reasonably priced. this may be a good time to seek greater growth opportunities abroad.

For investors still underweight international equities (and that includes most U.S. investors), we’d consider paring back some U.S. holdings in favor of non-U.S. stocks. Europe, in particular, is an area that seems reasonably valued. to be sure, Europe suffers from numerous challenges, including sluggish economic growth, and has a long way to go in implementing the reforms that could spark stronger growth. But stock prices in Europe are much more attractive than those in the U.S.

In addition, for those investors with a strong stomach and long time horizon, we would suggest considering emerging markets, which offer a combination of attractive value and compelling growth prospects.

Seek Greater Growth Opportunities Abroad

Question for

your portfolio:

Should you increase

your allocation to

non-U.S. stocks?

What about to

emerging markets?

International dividend-producing stocks are an attractive way to

get exposure outside the U.S. and gain some incremental yield.

Pare back some U.S. holdings and

consider non-U.S. stocks.

EM

E

R g I n g M A R K

ET

S

DE

V

E L O P E D M A R KE

TS

In addition to developed markets, don’t ignore

emerging markets.

InT E R n A T I O n A L S T O C

KS

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W H A T T O K n O W , W H A T T O D O [ 1 1 ]

Bond Buyers Beware: Once thought Safe, Now Risky?

Put simply, there are few bargains in traditional bonds

(meaning investments concentrated in treasuries). the main reason is the Fed and other central banks have been on a buying spree in recent years, propping up bond prices (and, thus, driving yields lower). Given the Fed’s plan to pull back on its extraordinary bond-buying program, the risks to traditional bonds are elevated.

While the Fed appears set to begin pulling back on these programs (i.e., “tapering”), the leaders of the Fed’s policy committee have been working hard to assure investors that interest rates will remain low for longer. For that reason, we expect the central bank to act gingerly to smooth any market reaction.

In this context of low rates and ample liquidity, investments such as high yield bonds should remain an attractive source for income. Being flexible and diversified globally remains key, as the possibility for more accommodative central bank actions in Europe creates potential opportunities there, and selectivity in emerging markets along with cheaper valuations could make these areas good diversifiers to U.S. fixed income portfolios.

Seek managers with flexibility and security selection expertise.

Question for

your portfolio:

Do you need to rethink

the way you’re investing

in bonds?

With rising interest rates, bond portfolio principal is at risk.

B u Y E R S B E W A R E

BonDs

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Ke y tAKeAWAyWhAt to Do

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H I g H E R T A X E S

Detroit and Puerto Rico make for rousing headlines, butthey do not characterize the broader municipal market. In our view, muni market fundamentals remain sound and municipal bonds look attractive.

We believe current market levels for municipal bonds offer an opportunity to reposition portfolios for the future. We find tax-exempt bonds, supported by strong fundamentals, to be reasonably valued relative to taxable alternatives. the onus of higher taxes should also bolster the asset class. Overall, munis remain a high-quality, attractive option for investors focused on tax-advantaged income and capital preservation.

Consider Munis for tax-Exempt Income

the key for investors is to be selective. Munis are still an attractive asset class—especially

at a time when many are paying higher taxes.

Municipal bonds

remain an attractive

source of income,

particularly on an

after-tax basis.

look past the headlines—the finances

of municipalities in general are actually getting stronger.

A D D M u n I S

AT T R A C T I V E I n C O M

E

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Go Beyond traditional Stocks and Bonds

Volatility looks to be high and finding growth and income are major challenges. But stocks are no longer cheap, neither bonds nor cash offer compelling value, and all could be vulnerable to increases in interest rates. that’s why we advise incorporating alternative strategies that can help broaden your diversification, protect against rising rates and contribute to growth. (Remember, however, that diversification does not ensure profits or protect against loss.)

Diversifying with alternatives means adding new asset classes such as physical real estate and infrastructure investments. It also means finding managers that have the flexibility to seek out income and returns across a wide variety of investments. Additionally, you may want to consider new strategies such as long/short approaches that can be employed with both stocks and bonds to mitigate volatility, seek out returns and contribute to diversification. While the risks of long/short strategies include the possibility of losses larger than invested capital, we believe they can offer a powerful differentiated source of return and the potential for more consistent results over time.

Question for

your portfolio:

What non-traditional

investment opportunities

should you consider?

Consider long/short strategies, infrastructure, real estate, and flexible investments.

Use non-traditional tools to diversify and smooth the ride.

TR ADITIOnAL STOCKS

AnD BOnDS

SEEK A SMOOTHER RIDE

Long/short strategiesInfrastructure

flexible Investments real estate

BR

O A D E n & D I V E R SIfY

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1 2 3Seek growth, Manage Volatility

} Allocate to adaptable strategies

} Seek returns beyond traditional U.S. bonds

} Reduce your interest rate sensitivity

} take a flexible approach to income

} Overweight credit for yield

} Adapt to higher taxes

} Diversify into unconstrained and alternative strategies

} Allocate to higher growth opportunities

} Manage volatility with conservative equities

With economic and market conditions slowly improving, but uncertainty high and income and returns still tough to come by, we suggest you make adjustments to your portfolio to take advantage of upside opportunities. We would encourage you to work with your financial professional to seek out new ways to grow your portfolio.

reL AteD resoUrces

Squeezing Out More Juicethe latest publication from the BlackRock Investment Institute provides a more in-depth discussion of the global trends that may drive financial markets in the coming year.

BlackRock Investment DirectionsBlackRock’s monthly asset allocation recommendations, with a focus on ways to position your portfolio in the coming year.

turning Insight IntoInvestment Actions

Rethink Your Bonds

generate Income, But Don’t Overreach

Investment ActIons for 2014

https://www2.blackrock.com/webcore/litService/search/getDocument.seam?venue=PUB_IND&source=GLOBAL&contentId=1111202181

https://www2.blackrock.com/webcore/litService/search/getDocument.seam?source=LITMOD&contentId=49446&venue=PUB_IND


RuSS KOESTERICH Global Chief Investment Strategist

JEffREY ROSEnBERg Chief Investment Strategist for Fixed Income

PETER HAYES Head of BlackRock’s Municipal Bonds Group

ABoUt the AUthorsRuss koesterich, Jeffrey Rosenberg and Peter Hayes are prolific commentators on the markets, can regularly be seen on CNBC, Fox Business News and Bloomberg tV, and are often quoted in the print media, including The Wall Street Journal, USA Today and Barron’s.

not fDIc Insured • may Lose value • no Bank Guarantee

The stated investment preferences are the opinions of the authors and do not reflect individual investors’ risk and return goals. Individual investors should consult with their financial professional about how to implement these opinions in a portfolio that is suitable for their goals and risk tolerance. These views do not necessarily reflect the investment decisions made within specific BlackRock portfolios. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 9, 2013, and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that, in certain respects, may not be consistent with the information contained in this report. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

Investment involves risks. Stock and bond values fluctuate in price so that the value of an investment can go down depending on market conditions. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are typically heightened for investments in emerging markets. Typically, when interest rates rise, there is a corresponding de-cline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income from municipal securities may be taxable.

for more InformAtIon: www.blackrock.com

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