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Equities: A new playbook for a new era

The Great Moderation is over. We have entered a period of greater macro and market volatility that requires a nimble, granular approach to portfolio construction.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Heightened macro volatility in growth and inflation, opportunities in Emerging Market (EM) equities and the role of structural transitions across certain sectors require investors to stay invested but nimble, with regular portfolio changes, as well as take a more granular view focusing on sectors, regions and sub-asset classes.

Investment implications

Against this backdrop, investors need to be prepared for more frequent portfolio changes by balancing views on broad risk sentiment with estimates of how markets are pricing in economic damage. The old playbook of simply “buying the dip” doesn’t apply in this regime of sharper trade-offs and greater macro volatility.
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Go granular to unearth opportunities

Emerging Market equities

[00:00:06.83] We think the outlook has brightened for emerging markets (EM), supported by a favorable policy backdrop, commodity exporter tailwinds, and China's reopening. While risks remain, including the potential for geopolitical tensions to escalate from here, we see opportunities to re-risk through selective EM equities. January recorded the highest monthly inflows into EM equity ETPs globally in a year, building upon a record-breaking year in 2022, with US$110 billion of inflows despite broad risk-off sentiment. This robust flow picture adds conviction to our relative preference for EM over DM (developed market) equities, although we do remain neutral overall, acknowledging headwinds from a challenged global growth picture. 
[00:00:57.35] So where do we look for opportunities in EM? The most significant tailwind in 2023 so far has been China's reopening, with a pickup in demand supporting China-exposed equities in markets from Korea to Brazil, as well as sectors in Europe like consumer discretionary. We believe that EM Asia could be the largest beneficiary of China's reopening. So to talk more about the outlook for China and EM Asia, I'm joined by my colleague Thomas Taw, head of iShares Investment Strategy in the APAC region. Tommy, over to you. 
[00:01:35.38] THOMAS TAW: Thanks, Karim. The MSCI Emerging Markets Index is now composed of roughly 75% Asian underlying exposures. That's a huge proportion. Investors who have moved into broad EM are now asking if they should look at single-country exposures to complete their core holdings in emerging markets. Our APAC single-country outlook for Q1 uses a framework of analysing which economies are the biggest net beneficiaries to China's reopening, while also keeping an eye on geopolitical tensions and inflation concerns in the region. 
[00:02:03.84] Now, broadly, we found that inflation for the majority of economies in Asia is within their respective central bank parameters, and we see the rate-hiking cycle ending earlier here versus countries like the US. We like South Korea because of its high exposure to China trade, appealing valuations, and relatively benign inflation dynamics, for example. 
[00:02:23.34] Since China's faster-than-anticipated shift away from its strict Covid-zero policy and the subsequent reopening of the economy, we've seen a strong return of capital inflows for both equities and bonds. With reopening largely done now, however, do we think the picking up in recent sentiment is sustainable? So to answer that, we take a look at flow and positioning. January was a record month for northbound Stock Connect flows. That's foreign investors buying into mainland stocks. January was also the third consecutive month of clients increasing exposure to both onshore and offshore China ETFs. We think this is a trend that is set to continue, as foreign investors have consistently decreased their portfolio weights to Chinese equities over the past two years. 
[00:03:03.97] Furthermore, Chinese household savings have now reached nearly US$150 billion. A strong economic start to the year could drive the next leg of capital inflows. And we see China delivering circa 6.1% GDP growth for 2023, above the consensus level of 5.5%. Overall, it's been a strong start to the year for sentiment towards Asia. And though investors should be aware of idiosyncratic risk and a higher risk premium attached to elevated political risks, we see room for Asian equities and fixed income to hop further into the year of the rabbit.

The outlook for EM equities has brightened in 2023, creating selective opportunities. We believe their risks are better priced than developed markets. Watch EMEA Head of iShares Investment Strategy Karim Chedid and Thomas Taw, APAC Head of iShares Investment Strategy, discuss where we see opportunities with a focus on EM Asia.

Investors may consider building out a China and an EM ex-China view to manage risk and apply their desired weight and investment approach to Chinese assets. This approach can be used to manage exposure to Chinese equities, amid potential challenges to longer-term growth prospects and wider geopolitical risks. EM ex-China exposure also provides access to EM commodity exporters.

Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.


We see persistent structural demand due to commodities’ role in renewable technologies. This demand, combined with declining stocks, will drive prices.

Supply shocks have also impacted the agribusiness industry, leading to a surge in prices since 2020, even accounting for recent declines. Structural issues, such as weather volatility and growing demand for food with limited resources, will require long-term investments in agricultural innovation and technology to increase yields.

Build portfolio resilience

Selectivity, focusing on structural transitions in specific sectors, can add quality and downside portfolio protection.

In particular, the healthcare sector is well positioned both currently and in the longer term. The proportion of over 65s is growing faster than any other age group globally,1 creating structural demand. Moreover, post-pandemic demand for electoral procedures should drive performance in the medical devices sub sector.

Long-term underinvestment in the energy and mining commodity sectors means they are a relatively small component of broad equity indices. Investors may find themselves underinvested in cyclical exposures. Among cyclicals, we prefer the energy sectors because we see earnings holding amid tight energy supply and elevated demand from China’s reopening.

1Source: The United Nations, World Population Prospects: the 2022 Revision

The fund invests in a limited number of market sectors. Compared to investments which spread investment risk through investing in a variety of sectors, share price movements may have a greater effect on the overall value of this fund.

Managing portfolio volatility

Heightened volatility in growth and inflation means we’re seeing greater swings in financial markets as central banks navigate the trade-off between tamping down inflation and destroying demand. Lower-volatility equity strategies, or those with low market correlation, may be attractive in this new environment. 

Minimum volatility strategies (min vol) have historically provided a cushion in periods of constrained economic growth. They are less sensitive to market drawdowns so can boost resilience, while also capturing the upside when markets recover helping investors to manage risk and stay invested.

We also see the value factor as being relatively cheap – our analysis shows it holds up well in a high-inflation environment.2 In past high inflation regimes, the value factor has outperformed other factors due to its inherent tilt towards sectors that benefit from inflationary environments.3 In these environments, value stocks may offer a more compelling investment opportunity than quality stocks due to their focus on generating near-term cash flows. Compared to quality stocks, which often have higher growth prospects and may be more sensitive to changes in long-term interest rates, value stocks inherently have a lower duration and are thus less vulnerable to interest rate risk. This is because value stocks typically have lower forward Price/Earnings (P/E) Ratios (Average forward P/E ratio for Value was 11.2 vs. 16.4 for Quality since December 1998).4 We like world and US exposures.

Unconstrained equity strategies are designed to look through market volatility and deliver alpha across economic cycles their bottom-up investment approach and high-conviction portfolios, can limit macro noise and help build resilience in a portfolio.

2,3Source: BlackRock, with data from Kenneth R. French Data Library and Robert J. Shiller. Data from 7/1926 to 12/2022.

4Source: MSCI, Interval: 31/12/1998-31/03/2023

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 funds may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Equity risk
The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

BlackRock can help you rethink the role of equities in your portfolio

The ongoing uncertainties call for a more flexible and diversified whole-portfolio approach in equities. More investors are using equity ETFs for flexibility and as cost-efficient building blocks. They are blending them with active strategies that seek to meet specific investment objectives and avoid unwanted risks.5

The BlackRock Portfolio Consulting Team can help you evaluate, evolve, and build an equity portfolio that meets your investment needs.

5Source: BlackRock investment institute, as of 30 November 2022.

Key Points



Your existing asset allocation to help you understand what drives risk and return in your portfolio with precision, ensuring that your investment decisions are working holistically towards your intended portfolio outcome. We can stress-test your portfolio to analyse impacts on portfolio efficiency and liquidity as well as your risk-return profile.



Your portfolio by identifying areas to enhance overall efficiency, or to incorporate new investment themes beyond your area of expertise. As investors’ asset allocations become more dynamic, we can help you build a strategic asset allocation with flexibility, so you can be nimble even in the face of extreme market volatility.



More efficient portfolios. The choice of instruments employed is key when moving from strategic portfolio construction to a holistic implementation approach. Investors should use all available tools in the box, spanning both index and alpha-seeking strategies.

There is no guarantee that stress testing will eliminate the risk of investing in this fund or strategy.

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