As markets climbed higher in recent weeks, investor sentiment seems to have turned from doubt to acceptance. Economic growth is above trend in most regions in the world, keeping us aloft, but we don’t appear to be soaring too dangerously and in peril of overheating.
As BlackRock’s recent Q4 Outlook discussed, this is still a good time to consider seeking out risk for the portfolio, but with many asset classes still pricey, where do we find opportunities? Call it the rethinking risk, rethinking returns conundrum.
But as the ETF Investment Strategy team notes in the recent Investment Directions commentary, we see four areas that offer interesting potential opportunities.
The value of value
Momentum stocks have shined this year. But we also favor the value factor, although some measure of caution has kept investors away from discounted segments of the market this year. However, flows into exchange traded products (ETPs) suggest sentiment could be shifting (source: BlackRock as of 10/31/17). We believe that value could benefit from a solid macro outlook, as well as improved sentiment.
Europe: Room to run
Despite recent headline noise around Spain, and stubbornly low inflation, we believe the rally in Europe, which has outperformed other developed markets this year, still has legs. We remain positive on European equities against a backdrop of sustained, above-trend economic expansion and a steady earnings outlook. ETP flows have been strong this year but still well short of 2016 outflows, suggesting the trade is not yet “crowded” (source: BlackRock as of 10/31/2017).
Emerging markets: Still in the early chapters
The strong outperformance of emerging market stocks in 2017 has investors wondering if the rally’s days are numbered. We believe the strong performance can continue, as the underlying fundamentals of emerging markets are improving. Our favored markets include India, Indonesia, Brazil and Argentina.
Playing defense with bonds
We have moved to a neutral view on U.S. investment grade debt from overweight, but the demand for income still persists, as seen by the enormous flows into fixed income ETPs this year (see the chart below). Smart beta fixed income exposures that embed quality and value tilts relative to traditional market capitalization weighted index exposures are one potential solution.
A strong year: Top 5 bond ETF asset class 2017 flows
As always, geopolitical risks have the potential to disrupt the current environment. Long-term government bonds can be useful diversifiers against volatility and equity market selloffs sparked by the sort of geopolitical risks that Isabelle Mateos y Lago is watching.
Investors interested in the value factor may want to consider iShares Edge MSCI USA Value Factor ETF (VLUE). For Europe, you may want to consider iShares Core MSCI Europe ETF (IEUR). Emerging markets? Take a look at iShares Core MSCI Emerging Markets ETF (IEMG). Finally, investors who would like to access investment grade or high yield bonds through more defensive exposure may want to consider iShares Edge Investment Grade Enhanced Bond ETF (IGEB), or iShares Edge High Yield Defensive Bond ETF (HYDB).
Chris Dhanrajis the Head of the ETF Investment Strategy team in iShares and a new contributor to The Blog.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.