INVESTMENT DIRECTIONS

Rethinking risk, rethinking returns

Nov 15, 2017
By Christopher Dhanraj

Fly like an eagle

As markets continue to climb higher, 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. It is a good time to consider seeking out risk for the portfolio, but with many asset classes still pricey, where do we find opportunities? Given BlackRock’s recent Q4 outlook, we see interesting potential opportunities in four areas:

The value of value

Momentum stocks have shined this year. But we also favor the value factor, and believe that it could benefit from an environment characterized by sustained global expansion, and more recently higher energy prices, and the potential for rising rates.

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. Ongoing expansion and strong earnings underscore this view.

Emerging markets: Still in the early chapters

The strong outperformance of EM 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.

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. Smart beta fixed income exposures that embed quality and value tilts relative to traditional market capitalization weighted index exposures are one potential solution.

Don’t forget about geopolitical risk

The markets are calm, but geopolitics are anything but. Long-term government bonds can be useful diversifiers against volatility and equity market sell-offs sparked by geopolitical risks.

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