Active investing in a
changing world

Feb 24, 2017

Russ Koesterich, Portfolio Manager of the BlackRock Global Allocation Fund, explains why good investment results will require good
decisions in 2017.

Key points

  • With markets at a transition point, precision and idiosyncratic insight will be key drivers of investor outcomes.
  • Asset allocation is the toughest part of investing — and often where significant returns are derived.
  • Investment success in 2017 will require global reach, flexibility and active decision making.

For U.S. investors, achieving gains was fairly uncomplicated in recent years. Central banks were on a post-crisis mission to prop up economies and markets; equities advanced; and bonds, while offering little income, extended their decades-long bull market. 2017 may be different. The environment is becoming decidedly more complex. Russ Koesterich explains why he believes a more active and nuanced approach to investing is required to succeed at a time when depth and decision-making can mean all the difference.

Times are changing

2016 featured a profound transition. The year opened with intense fears of global recession and rippling deflation. Stock prices plummeted, rates fell and oil collapsed. It all began to change mid-year. With an uptick in optimism for the global economy came a shift in market mood—and in investor preferences.

Instead of yield at any price, investors wanted companies and assets that would do better in an environment of stable or rising growth. This prompted a rebound in commodities, including oil, as well as in value stocks, which tend to do better when growth expectations are buoyant. Rates rose, causing many to call an end to the 35-year bond bull market.

2016: A tale of two markets
Index returns, 12/31/15-6/30/16 and 6/30/16-12/31/16

A tale of two markets chart

Sources: BlackRock, Bloomberg. As of Dec 31, 2016. Past performance does not guarantee future results. Index performance shown for illustrative purposes only. It is not possible to invest directly in an index. Index returns are calculated in USD. Gold represented by the S&P Goldman Sachs Gold Index, utility stocks by the MSCI World Utilities Index, global government bonds by the Citigroup World Government Bond Index, consumer staples stocks by the MSCI World Consumer Staples Index, 10-Year Treasuries by the Bofa/ML Current 10-year U.S. Treasury Index, U.S. stocks by the S&P 500 Index, non-U.S. stocks by the FTSE World ex-U.S. Index, technology stocks by the MSCI World Information Technology Index, U.S. dollar by the DXY Index, Japanese stocks by the TOPIX Index, and financial stocks by the MSCI World Financials Index.

Befriend the trend?

The big question is whether the prevailing market dynamics are fleeting or enduring. Assuming we see the tax reform and pro-cyclical stimulus the new administration has suggested, then our default view is for interest rates to continue to rise in 2017. And, of course, that means bond prices fall.

To the extent any rise in bond yields is modest and gradual, these same developments would be positive for equity markets. A stronger economy, as well as corporate tax reform, would mean stronger company earnings. And in a world in which U.S. interest rates are rising, the dollar is probably climbing as well, a tailwind for European and Japanese exporters. So international developed markets also stand to benefit from an improving U.S. economy and a stronger dollar.

Maximizing the potential benefits of international equities requires a deft hand. Active currency management, in particular, is critical. The Global Allocation team is equipped with the tools and security-level research capabilities to capitalize on the evolving opportunities.

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Russ Koesterich
Portfolio Manager, BlackRock Global Allocation Fund
Russ Koesterich, CFA, JD, is a Managing Director and Portfolio Manager of BlackRock’s Global Allocation Fund. The team is part of BlackRock's Multi-Asset ...