BlackRock upgrades Europe stocks on economic restart, warns of U.S. risks

By Karin Strohecker and Dhara Ranasinghe

LONDON (Reuters) - Europe's efforts to kickstart economies hit by COVID-19 has prompted BlackRock Investment Institute to upgrade its view on European stocks to "overweight", while warning of a risk that the U.S. policy response could be scaled back too soon.

"The region (Europe) is exposed to a cyclical upside as the economy restarts, against a backdrop of solid public health measures and a galvanizing policy response," BlackRock, the world's largest asset manager, said in its mid-year outlook.

The same applied to Japanese stocks, which BlackRock upgraded from "underweight to "neutral".

This came at the expense of U.S. stocks, for BlackRock reduced exposure to "neutral", citing risks of fading fiscal stimulus, an extended epidemic and renewed China-U.S. tensions.

"The U.S. was strong in its monetary policy response, its fiscal response," Mike Pyle, global chief investment strategist at the BlackRock Investment Institute, said during a mid-year media briefing.

"As we look out over the coming 6-12 months, we think there are significant risks around the U.S. retrenching too soon the policy support," Pyle added.

World stocks have been on a rollercoaster ride in the first half of 2020.

Having slumped 35% from Feb. 20 to March 23, they are now within 10% of February's record highs thanks to lashings of fiscal stimulus, interest rates reduced to 0% or below in most major economies and massive quantitative easing by central banks.

European stocks are down almost 14% since the start of the year, while the S&P 500 has slipped 6% over the same period.

In fixed income, BlackRock said it liked U.S. Treasuries and expected long-term bond yields to fall further than other developed market peers.

BlackRock also downgraded both hard currency debt and equities in emerging markets to "underweight", citing limited policy space to counter the economic fallout from the coronavirus pandemic.

(Reporting by Karin Strohecker and Dhara Ranasinghe; Editing by Gareth Jones)