June 30 - The BlackRock Investment Institute (BII) said on Tuesday it has moderated its outlook for several emerging market asset classes while increasing conviction in euro zone government bonds in its mid-year outlook.
In a series of allocation adjustments, BII moved its overall view on emerging market equities from a small overweight to neutral. The institute noted that, despite the downgrade, there remain targeted opportunities where the rollout of artificial intelligence is expected to spur demand for infrastructure - a trend it singled out as particularly relevant in Latin America.
On the fixed-income side of emerging markets, BII also reduced its stance on emerging market hard-currency debt to neutral from a small overweight. The institute said fundamentals in hard-currency sovereign debt have improved, but it finds the risk-reward trade-off less compelling relative to local-currency debt.
Accordingly, BII rotated its positioning in emerging market local-currency debt, shifting from neutral to a small overweight. The note states a preference for local-currency exposure because of the yield on offer relative to the asset class's volatility and because fundamentals are improving.
Outside of emerging economies, the institute increased its allocation to euro zone government bonds, moving from neutral to overweight. The upgrade applies especially to short- and medium-term maturities, where BII said it is overweight. The institute argued that markets are currently pricing restrictive policy rates of about 3% for several years and that this level looks excessive.
The mid-year outlook therefore reflects a more cautious stance on equity and hard-currency sovereign exposure in emerging markets, combined with selective overweight positioning in both local-currency emerging debt and euro area sovereign bonds.
What this means for markets
- Emerging market equities - allocation set to neutral from a small overweight, with selective infrastructure chances tied to AI in Latin America.
- Emerging market hard-currency debt - moved to neutral from a small overweight as fundamentals improve but relative returns look less attractive.
- Emerging market local-currency debt - shifted to a small overweight from neutral, favored for yield versus volatility and improving fundamentals.
- Euro zone government bonds - upgraded to overweight from neutral, with a focus on short- and medium-term maturities given perceived overpricing of restrictive policy rate expectations.
These changes outline BII's revised preference across equity and fixed-income instruments, while emphasizing areas where it sees more favorable risk-adjusted returns.