A world of opportunity

May 27, 2021

U.S. stocks have been rewarding, but the opportunity set doesn’t end there. International and emerging markets are ripe for the stock-picking. James Bristow, head of BlackRock’s international equity team, and Gordon Fraser, head of our emerging markets equity team, explain how active strategies can help investors capture strong returns from abroad.

Why invest outside the United States?

James: Looking at the big picture, you have to recognize that the United States is not the only country where companies generate strong earnings. The rest of the world is taking a bigger share of the global economy. In fact, the U.S. represents only 15% of global GDP, and the other 85% abounds with opportunity.

Additionally, revenue growth outside the U.S. is expanding, but U.S. companies are capturing that growth at a declining rate as companies overseas are increasingly dominating their own markets – a trend we expect to continue into the next decade.

Interestingly, some of the targeted investment themes that have been working well in the U.S. have great potential in other countries as well. Electric vehicles, for example – 75% of that market is outside the U.S. Consider e-commerce and gaming – these trends are global and there are companies in various parts of the world that are well-positioned to benefit.

The rest of the world is a larger driver of global growth and innovation

Intl Em Chart

Source: IMF World Economic Outlook as of October 2019.

But aren’t foreign markets very risky?

Gordon: International investing does involve special risks, including currency fluctuations, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.

These risks often are heightened for investments in emerging markets (EM) as they are more likely to experience currency devaluations, and many of those securities markets have lower trading volumes and less liquidity than their developed counterparts.

It’s understandable that investors would be apprehensive, and that’s exactly why actively managed funds make a big difference. Investors can rely on us to make well-informed decisions and carefully manage risks.

James and I spend our days immersed in what’s going on in every corner of the world. We have large, global investment teams, so we have boots on the ground scouring for opportunities in local markets. We also have the resources to effectively measure risks and return potential, and the expertise to analyze data in the context of macro trends.

Volatility can be beneficial for investors in active strategies because it creates opportunities for fund managers to capture outperformance. Market movements can present attractive entry points to add desired positions, particularly in emerging markets (EM), where stock prices move around a lot, even for companies with fantastic growth prospects.

Volatility can be beneficial for investors in active strategies because it creates opportunities for fund managers to capture outperformance.

How do you look for opportunities?

Gordon: Both James and I have some advantages that are key differentiators for us when it comes to finding opportunities. Firstly, our global investment teams, but also our dynamic approach to style and the ability to be flexible and pragmatic.

With respect to style, most managers focus on either growth or value stocks. But outperformance between the two is cyclical, so if you’re committed to just one, you’re going to have some potentially long periods of underperformance. You’re also limiting your universe of investments, so you could miss out on some great stock-specific opportunities. By having a style-flexible approach, we believe we can identify more outperformance opportunities than if we boxed ourselves into just one.

In the BlackRock Emerging Markets Fund, we find our best opportunities when styles reach their extremes – in terms of both performance and valuations. When those conditions coincide with a macro inflection point such as in global growth or rates, that’s when we’ll make a move.

James: We take a similar approach in the BlackRock International Fund. We’ll look at the price the market is paying for growth, or for quality, for defensiveness, recurring revenue streams, etc. Whatever the characteristic may be, if we believe the market is over- or underpaying for it, we’ll analyze it more deeply to see if there’s an investable opportunity there.

Another important point is that we look for returns in an unbiased way. When the market has written off a stock as a loser, or has bid one up incredibly high, we’ll take a closer look. If you understand that particular industry and how the players interact, it’s possible to identify where the market is mispricing a security and take advantage of that.

What helped you outperform in 2020?

Gordon: Having a flexible process really proved its worth in 2020. We had to make a lot of judgement calls.

In the Emerging Markets Fund, we use a macroeconomic dashboard to track the stage of each country’s economic cycle and we shift capital from late-cycle exposures into early-cycle opportunities. But when COVID shut everything down at the same time, we had to decide which countries we wanted to own for their ability to recover quickly and their potential upside in an early-cycle environment.

The high levels of volatility opened up opportunities for us to pull different levers in EM stock dispersion, country allocations and style tilts, and we were able to deliver a pretty good year of outperformance.

James: At the onset of the pandemic, we looked at every holding in the International Fund and considered which were likely to suffer a short-term versus long-term impairment to their business. Differentiating between the two led to a series of decisions from there.

In the months that followed, we saw mounting risk in growth assets and by mid-summer, valuations looked extremely stretched. Meanwhile, some major vaccine trial readouts were expected by year end. We removed a significant portion of growth stocks from the fund because we recognized that positive vaccine data would be a catalyst for the growth-value rotation that we subsequently saw. Taking that aggressive action ahead of time helped the fund navigate well through the fourth quarter and even into the first quarter of 2021.

And like Gordon’s team, we took advantage of the volatility. Many well-managed companies across international markets fell between 30 and 60% in very short order. We urgently analyzed where share prices had overreacted to short-term business disruptions. We made decisions that are still benefiting the fund today.

What’s your outlook for the coming year?

Gordon: I’m looking forward to a positive year for EM. The International Monetary Fund estimates EM economies will grow 6.3% this year versus a -2.4% contraction in 2020. A weaker U.S. dollar could also be a tailwind for EM stock performance in the coming months. We’ll be particularly focused on the earlier countries to pass through this health crisis, such as China and Israel, to see how their economies evolve from here.

But I think the most important thing to watch right now – not just for EM, but for any asset class – is the front end of the U.S. yield curve given potential difficulty for the Fed to maintain its intended position amid a strong recovery.

James: While Fed liquidity has been the dominant driver of the recovery from the start, we should expect growth at the individual company level to take the wheel at this point. I think a smooth passing of the baton is really important and Gordon and I will be watching that play out across industries and countries. We’ll be looking for idiosyncratic opportunities in stocks where we have a different view than the market regarding risk and return potential.

I expect to see global macro shifts giving rise to new opportunities, which will require our close attention. Markets keep moving faster, and with the information overload, it can be very tricky for investors to distill the real signals from the noise. Our teams have the expertise and resources to assess what’s happening and identify opportunities with the goal of providing our investors strong performance with low levels of volatility.

To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and month end, please visit BlackRock International Fund and BlackRock Emerging Markets Fund on blackrock.com.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.