INVESTMENT DIRECTIONS

Orchestral movements

May 12, 2017 / By BlackRock

Symphony

The word “symphony” comes from the Greek word meaning “agreement or concord of sound.” With the concerns surrounding U.S. and European politics receding somewhat, investors seem to have regained their optimism, pushing markets higher. At some point, the music is likely to slow, but the ongoing signs of global growth suggest the melody might continue for now.

Allegro

Many have questioned if the “reflation trade”—overweighting cyclical equities— is over, but we believe it may have room to run. This is especially true outside the United States, where markets are catching up to the combination of stronger growth, higher inflation and monetary policy. Easing of political turmoil helps, as in Europe, where we’ve seen significant flows into exchange traded products following the results of the French election.

Adagio

Still, although markets continued to pass or press up against all-time highs, we see muted return potential across asset classes in the coming five years. In the United States, stocks are not cheap, although policy measures like tax reform and deregulation could boost returns. Of course, timing and implementation of those are unclear

Legato

Against this backdrop, we prefer equities over fixed income, and selected credit over government bonds. Within equities, we favor Europe (despite renewed investor interest, we see the asset class as still underowned), Japan (positives are improving global growth, shareholder-friendly corporate behavior and earnings upgrades) and emerging markets (supported by economic reforms, improved corporate fundamentals and attractive valuations). In the United States, we like value, financials, selected health care and dividend growers. We also favor a broader diversification approach that includes factors and alternative asset classes like real estate.

Encore

Finally, a coda: The classic opera The Marriage of Figaro is set in Spain, written in Italian by an Austrian based on a play by a Frenchman—a reminder that the connections in Europe run deep and the recent reduction of political risk for the near term a sign that won’t change soon.

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