BlackRock Inc. says it’s staying away from U.S. stocks amid high valuations and a strengthening dollar, preferring equities in Europe and Japan.
The world’s biggest fund manager says the dollar will appreciate further next year against both the euro and yen, after outperforming all its major peers in 2015 as the Federal Reserve pursues a gradual pace for raising interest rates. The Standard & Poor’s 500 Index is on track for a fourth annual gain, after climbing to a record in May.
“Earnings growth in the U.S. will remain challenged, given the strong dollar,” Russ Koesterich, global chief investment strategist at the New York-based firm, said at a presentation in Tokyo Thursday. “U.S. valuations are the most stretched among developed countries.”
Koesterich says the Fed will raise rates “two or three times” next year, pushing up the yield on benchmark 10-year Treasuries to 2.75 percent at the end of 2016 from 2.24 percent on Thursday. BlackRock has an underweight position in sovereign debt of large developed countries, he said.
Fed Chair Janet Yellen and her board tightened policy for the first time in almost a decade on Wednesday.
BlackRock believes the importance of central bank policy for markets will diminish next year, to be replaced by valuations and the business cycle. The company’s positive views of European and Japanese equities are based on those factors, rather than expectations for additional monetary stimulus, Koesterich said.
Even so, BlackRock has “modest” expectations for returns in 2016, he said.
“One of the things investors want to consider is not stretching too aggressively to achieve a high yield,” Koesterich said. “It will come with considerable risk.”