Defensive portfolios that focused on income generation and avoided 'dangerous' three-to-six month investment windows would bolster against the chances of global stagnation, according to BlackRock's Investment Institute's mid-year investment outlook.
Slower economic growth and market scepticism had increased the odds of BlackRock's 'stagnation' scenario to 40-45 per cent, but options could capture the risk on/risk off market movements that characterised this scenario, it said.
'Divergence' between faster growing emerging economies and the indebted Western world had been the company's call at the beginning of the year, but policymaking would dominate markets for the rest of the year, according to BlackRock.
The company's 'nemesis' scenario – which included global recession and a downturn across asset classes – was still high at 15-20 per cent due to the US fiscal cliff's potential to be realised, it said.
BlackRock said direct emerging market exposure emphasising individual companies with strong cashflows and proven ability to add value to dividends were good equity investments if relative trade values were taken into account.
For fixed income, it said credit and emerging markets debt were better than sovereign bonds from Japan and the Western world, while high yield bonds and mortgage securities would protect in case of yield rises.
Land, US residential housing, energy and clean energy operators were listed as a good focus for alternatives, while options focused on hedge fund relative value strategies.
But if the Eurozone fixed its banking system, the US showed credible signs of resolving its fiscal issues and China's efforts to boost economic growth paid, all bets were off and investors should consider readjusting their portfolios, it said.
