One of the world's largest asset managers is diverging with the consensus view with regards to US inflation and the flattening US yield curve, but aligns with the consensus on the prospects for the global economy in 2018.
In a briefing in Hong Kong, BlackRock forecast the return of inflation in the US, which has remained stubbornly below the US Federal Reserve's 2% target despite a tight labor market.
"Despite the soft data in 2017, we think we will see wage inflation coming back in the US," said Belinda Boa, Head of Active Investments for Asia Pacific and CIO of Emerging Markets. "That means we expect to see the US yield curve starting to rise."
BlackRock sees US core CPI drifting back towards 2% early next year, versus the consensus forecast of 1.8%, where it is now.
The investment manager, which has US$5.7 trillion in assets under management, thus sees the current handwringing over the flattening US yield curve as overdone. It is not a harbinger of a recession, said Gregor Carle, Head of APAC Fixed Income Product Strategy, but simply reflects market expectations of Fed rate increases.
The more constructive views add additional fillip to BlackRock's forecast that the global economy has "room to run" in 2018. The return of inflation means rising interest rates in the US are a justified pre-emptive policy response and are not likely to short-circuit growth in the world's largest economy or push it into recession.
China and emerging markets
That's good news for the rest of the world, despite BlackRock's forecast of slowing growth in China (but not a hard landing or a recession). China Investment Strategist Wenjie Lu notes that a number of infrastructure projects have been suspended. Efforts to cool the property market will also continue.
China is placing less emphasis on GDP growth, says Lu, and that provides room for more challenging reforms designed to promote financial stability, solve the debt problem and improve quality of life by taking better care of the environment.
Good for business
Slowing economic expansion in China will not necessarily crimp business growth. Lu forecasts "double-digit earnings growth" for the New Economy sector, which counts companies like Alibaba and Tencent among its stars.
And some Old Economy companies have been using technology to transform themselves -- growth in fixed asset investment in advanced manufacturing in China is surging while investment in new construction and capacity expansion is falling.
"Next year, we expect a slowdown in traditional Old Economy sectors such as real estate and infrastructure, but we will see expansion in innovation-driven sectors such as corporate IT and consumer services," said Lu.
Advice for CFOs
BlackRock sees corporate earnings going in the same upward direction across the globe, with the trajectory much more pronounced in emerging markets, especially in Asia. Companies in developed markets had experienced earnings growth since 2015, but those in emerging markets are catching up only now.
BlackRock expects the earnings momentum in Asia to be particularly strong in 2018 because it expects real GDP growth in the region to come in at 6%, compared with 2.4% in industrial countries, and 2.6%-3.1% in Emerging Europe, Latin America, and Africa and the Middle East.
Rising interest rates are not seen as stunting the earnings momentum, but they have implications on financial management.
Asian corporates have issued debt in record volumes this year, notes Carle. "That's happened because companies see the opportunity to refinance at relatively low rates. If you are a corporate treasurer or CFO, taking advantage of that opportunity is important."
Refinancing ahead of future maturities to take advantage of today's low rates, he says, is simply "good practice."