INVESTMENT DIRECTIONS

Gridiron action

Nov 28, 2018
By Christopher Dhanraj

Looking past political gridlock in the U.S.

With the U.S. midterm elections behind us and producing widely expected results, we anticipate political gridlock but few long-term market implications for now. Instead, investors can return their focus to fundamentals. Still, markets are likely to be more like a ground game, and less the long bomb. Our base case still sees strong U.S. growth underpinning the global expansion, and U.S. earnings continuing to impress. The divided government means a number of sectors are in focus, including defense, healthcare and infrastructure.

Japan: A lot to like, but where’s the catalyst?

In Japan, a weaker yen, solid corporate fundamentals, bargain valuations, a stable political environment and central bank buying support an investment case for the country. Indeed, Japanese equities are outperforming the global developed ex-U.S. equities benchmark—and are less expensive. But we see no catalyst for a rally and remain neutral.

Emerging markets:
Seeking a buffer

Emerging market (EM) assets have continued to struggle as decelerating global growth, along with greater macro uncertainty, has tightened financial conditions. We’re constructive on EM equities, but this year is a sober reminder of the risks of EM investing. We remain positive toward EM as valuations have cheapened this year, positioning remains light, and earnings growth remains strong. Still, investors may want to consider a minimum volatility strategy, which historically has provided some buffer during sell-offs.

The rise in Fall of rates

After trading sideways for most of the second quarter, Treasury yields rose steadily from the end of August through the beginning of October. This was largely due to increases in real rates, rather than inflation expectations. Clearly, the market is not yet worried about inflation. Nevertheless, we continue to favor TIPS over nominal Treasuries over the long term, as well as Treasury floating rate notes.

Q4 factor outlook

Factors are broad, persistent drivers of return. They are present both across and within asset classes and include quality, momentum, value, size and minimum volatility. In this issue, we highlight the views of BlackRock’s Factor- Based Strategy Group regarding these factors. In the current environment, we favor momentum and minimum volatility, are neutral on value and quality, and underweight size.

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