Apr 27, 2015 - Heidi Richardson
As my colleague Russ Koesterich pointed out earlier this week, the start of a new quarter is always a good time to take a step back and give your investment portfolio another look.
Looking at the first quarter in the rearview mirror, it largely played out as we expected, but there were a few surprises, including how much the dollar has strengthened and how far interest rates have fallen. Given this, while we at BlackRock currently still prefer stocks over bonds, it may be more important than ever to be choosy within your equity portfolio.
So, where do we see potential opportunity?
The 2015 Spring Update to BlackRock’s annual outlook highlights a few key areas, but you may still be looking for more details about the specific markets and sectors. Here are four equity segments to consider now, including options for accessing these exposures with iShares exchange traded funds (ETFs).
There are several reasons to consider the eurozone, and Germany in particular. First, the European Central Bank’s (ECB)’s $1.1 trillion bond-buying program is beginning to serve as a catalyst for economic growth in Germany and the broader region. It also has pushed yields to negative territory in some cases, driving income-seeking investors toward European stocks, according to first-quarter flow data. In addition, the stronger U.S. dollar could potentially boost the revenues of the region’s export-oriented economies, notably Germany. Finally, European stocks still trade at a significant discount to their U.S. counterparts and their long-term average.
However, while the European market may benefit from these tailwinds, it’s important to consider the possible impact that a further potential weakening of the Euro could have on U.S. dollar-based investments in the region.
Two options to consider when accessing this potential opportunity are the iShares Currency Hedged MSCI Germany ETF (HEWG) and the iShares Currency Hedged MSCI EMU ETF (HEZU). These iShares ETFs invest in German and eurozone securities, respectively, and seek to mitigate exposure to fluctuations between the value of the euro and the U.S. dollar.
Another developed market worth considering is Japan. In addition to a market-friendly central bank, there are other reasons to like stocks in the Land of the Rising Sun. Japanese equities remain inexpensive even after outpacing the U.S. market year-to-date, as strong earnings momentum has kept valuations in line. Abenomics reforms are encouraging shareholder-friendly activity, and wage increases could be a boon to consumer spending. Additionally, exports and tourism are hitting record numbers, and the market continues to benefit from increased equity buying by pension funds. On the heels of plans by the Government Pension Investment Fund (GPIF) to double its investment into Japanese equities, other institutional investors have committed approximately $250 billion.
3. Emerging Markets
Though risks and performance vary by country, we see potential among the broader group of emerging markets, andin particular emerging Asia. As an oil-importing region, Asia may benefit from lower oil prices, and the rally in China’s Shanghai-listed A Shares (difficult for non-Chinese investors to access) is extending to other markets in the region. Finally, reforms in countries such as China and India could potentially open up their economies and continue their growth.
ETFs such as the iShares Core MSCI Emerging Markets ETF (IEMG), which uses the MSCI Emerging Markets Investable Market Index as its benchmark index, offer diversified exposure to Asia and other emerging markets.
4. U.S. Technology
Finding value in the U.S. has become more difficult, but the U.S. technology sector has potential for continued growth. Mature, established tech companies are demonstrating that “cash is king,” by putting their large cash accounts to work for shareholders through buybacks and dividends. For example, several prominent technology companies have already raised dividends. In addition, tech firms’ strong balance sheets may help insulate these companies as interest rates rise over the longer term.
One option to consider for access to the U.S. technology sector is the iShares U.S. Technology ETF (IYW), which is a pure technology play as it’s presently the only technology ETF that doesn’t also include telecom companies.
Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares. You can find more of her posts here.
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. Diversification and asset allocation may not protect against market risk or loss of principal.
The iShares Currency Hedged Funds’ use of derivatives may reduce the Funds’ returns and/or increase volatility and subject the Funds to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Funds could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Funds’ hedging transactions will be effective.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. Technology companies may be subject to severe competition and product obsolescence.
This material represents an assessment of the market environment as of the date of publication. The views expressed are subject to change and are not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. 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 material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.
This document contains general information only and does not take into account an individual’s financial circumstances. 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.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.
©2015 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.