Global Allocation Insight

Defensive maneuvers

Dec 20, 2018

Signs of slowing growth warrant
a more defensive portfolio.

Economic evidence suggests global growth rates have peaked, albeit with divergence between regions. The rate of growth appears to be slowing given signs of weakness in non-U.S. economies, more instances of economic data surprising to the downside, and softer manufacturing and housing data.

Notably, the Purchasing Managers Index (PMI), a leading indicator of manufacturing activity and broader economic growth, has been declining from an early 2018 peak in both the Eurozone and China. In the United States, PMI appears to be slipping, although it is still comfortably over 50.

Global manufacturing activity shows signs of weakening
Purchasing Managers’ Index in the United States, Eurozone and China

Global healthcare spending on the rise

Source: Thomson Reuters Datastream, Institute for Supply Management and IHS Markit, BlackRock Investment Institute, November 30, 2018. PMI stands for Purchasing Managers' Indexes. PMI is an economic indicator that is derived from monthly surveys of private sector companies. An index level above 50 indicates an improvement in manufacturing activity, while an index level below 50 indicates a decline.

Consider this manufacturing data against a backdrop of tightening financial conditions — higher interest rates, a stronger dollar, a more volatile stock market and less benign credit markets. Generally, when borrowing costs rise, consumer confidence is challenged and as a result, credit growth decelerates.

Housing is another important area to watch. The housing market tends to have a “multiplier effect” on other consumption, and it often leads the broader economy. Recent U.S. housing data reveals a deceleration in prices and sales, while starts and building permits are both weakening. To be clear, while there are few obvious signs that a recession is imminent, this recent data does suggest that growth is likely to be lower in the coming quarters.

In light of these leading indicators and other economic signals, we have positioned the BlackRock Global Allocation Fund more defensively. Within equities, we are focusing on stocks which we believe are more defensive in nature in that they feature some combination of low sensitivity to economic cyclicality, strong pricing power, and low levels of debt. We believe companies with these characteristics tend to be more resilient during periods of market volatility and rising interest rates.

We are putting a similar focus on quality within fixed income, where the majority of the fund’s exposure is in U.S. Treasuries. More broadly, we believe it is important to diversify equity risks with exposure to cash, gold, the U.S. dollar and Japanese yen to help manage volatility. In this environment, we also believe it is prudent to remain vigilant for changes in the correlation characteristics between asset classes and to hedge accordingly against market volatility.

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Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies ...
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