Investors must get realistic on returns in sluggish markets: Blackrock

By Jamie McGeever

LONDON (Reuters) - The most challenging global market environment in years will see annual investment returns slashed to just 4-5 percent over the next five years, strategists at investment firm Blackrock said on Wednesday.

The high degree of uncertainty surrounding global growth and policymaking also means investors should diversify as much as possible and be nimble enough to reduce their exposure to risky assets when needed, it said.

Sara Morgan, managing director of diversified strategies at Blackrock, said the S&P 500 index's average annual real return of 14 percent over the last five years will not be repeated over the next five. Instead, investors should expect 4-5 percent.

"The last few years were all about 'how do I capture the upside', but now it's 'how do I protect the downside'," Morgan told a press briefing at Blackrock headquarters in London's financial district. "You're going to have to make your assets work so much harder."

Blackrock is the world's largest asset manager, with over $4 trillion of assets under its wing.

Morgan and her colleagues have reduced their equity exposure and bought 30-year U.S. Treasury bonds in recent weeks as the tremors from China, emerging economies and commodity markets have rippled across all markets.

They have also dipped into the derivatives market to protect themselves against sharp swings in equity markets, and expect volatility to remain high. If market and economic conditions deteriorate further, they will extend this strategy further.

But they are optimistic on the outlook for the global economy, and therefore confident that markets can ride out the volatility. Global recession, as forecast by economists at U.S. bank Citi, is not Blackrock's central scenario.

"We're at a very uncertain juncture ... but things aren't as bad as people think," said Pierre Sarrau, deputy chief investment officer of multi-asset strategies at Blackrock.

He and his team are buying European equities, favoring Italian stocks in particular through buying call options.

Call options are a bet on an asset rising in price, giving the holder the option, but not the obligation, to buy at an agreed price in the future.

(Editing by Mark Heinrich)

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