Rethinking risk and returns

By BlackRock Investment Institute

Market volatility (vol) has been testing lows, while equity indexes hitting new highs inevitably stirs talk of stretched valuations. We give our take on volatility and valuations.

Terry Simpson, Multi-Asset Investment Strategist, discusses the rethinking risk and returns theme.

Market volatility has remained historically low, prompting fears that it may pick up in the near term. However, low-volatility regimes tend to be the norm, especially when economic growth is stable. Without systemic financial threats, we think the low-volatility environment may persist.

Some investors may also worry about high equity valuations when compared to historical averages. Our belief is that structurally low interest rates have supported and will sustain higher prices on stocks. Viewed through this lens, we think it is important to look past temporary sell-offs caused by geopolitical jitters or other mini-shocks. Equity dips can be buying opportunities.

You may wish to: keep calm, but hedge on

Against this positive backdrop of economic growth, staying invested through inevitable drawdowns may be key. This is precisely when fixed income as a risk management tool can be critical. A tilt toward actively-managed fixed income strategies may help investors navigate an unpredictable rate environment, while providing a ballast to risk assets.


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